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2017: A Year Of Rising Stocks, Tax Reforms, MiFID, Bitcoin And Impact Investing
Tom Burroughes
2 January 2018
When 2017 began and people fretted about the new US president, geopolitical concerns and Brexit, the financial weather looked gloomy. Well, it shows how predictions can be hard. As an aside, since Brexit hasn't been mentioned yet, debate continues on whether the UK goes for a "soft" departure from the EU while retaining much of the infrastructure, for good and bad, of the Single Market, or takes a "cleaner" exit and reinvents itself as a sort of offshore centre in Western Europe. (Some claim that the UK already deserves that tag, given its non-dom tax system and other features.) Brexit dominates much of the political debate in the UK. The wealth sector certainly craves as much clarity as possible. Back to the subject of investment, a prominent sub-theme here has been impact investing: putting money to work to achieve non-financial as well as financial objectives. A number of asset managers and wealth players are keen to talk about their efforts in this area. As time goes by more data will emerg on how well such investments perform and what the actual effects on the ground are. One cause for caution is the "mission drift" that might arise if too much money flows in without there being enough geninue impact investments to go around. And this is an area that hasn't yet been seriously tested by a downturn.
First of all, last year was a barnburner if one held equities or digital currencies.
The past 12 months saw the bull market in equities continue, almost a decade in length. On a cyclically-adjusted basis, price-earnings ratios for developed countries’ equities, about 23 times earnings, are now expensive, but not “sensationally so” in the words of and below 42 at the height of the late 1990s dotcom bubble. Based on figures as of 21 December, 2017, total returns for the MSCI World Index of developed countries’ equities are, in dollars, 22.7 per cent (returns composed of capital growth plus reinvested dividends.) The MSCI EM benchmark of emerging markets shows total returns of over 34.2 per cent.
The gradual normalisation of interest rates is slowly starting in the US and UK, although older readers will remind themselves that the wafer-thin increases by the Federal Reserve and Bank of England are light-years away from the hefty rate changes seen during the 70s, 80s or indeed the 90s. Sovereign bond markets are expensive. The yield on the US 10-year Treasury bond is 2.4 per cent, while that of the 10-year German bund is 0.4 per cent. Taking price-earnings ratios and inverting them to obtain the dividend yield on stocks, it shows that, for example, that US dividend yields are lower than for a 10-year US government bond, at 1.9 per cent. Eurozone equities’ dividend yields are 2.8 per cent; in the UK, they are 3.9 per cent (yields on 10-year UK gilts, for comparison, are 1.3 per cent). That some equity yields are trading close to, or even below, certain bond markets might suggest valuations are getting cooked. (Source for figures: DataStream, Rothschild & Co, Bloomberg.)
But, with a US tax cut over 10 years of $1.5 trillion being signed into law late in December, including the headline-grabbing corporate tax cut from 35 per cent to 21 per cent, US corporate earnings might continue to justify some, if not all, of the gains. Wealth managers have issued several calls for caution in recent months, but most aren’t underweighting equities yet and with bond yields where they are, opportunities aren’t always easy to find.
Going private and direct
Another clear trend last year was the continued interest in, and action around private debt, equity and real estate, particularly in the case of family offices, ultra-high net worth investors and certain clients unhappy with low yields. There being no free lunches in capitalism, investors have had to tolerate lesser liquidity and longer time-frames to get a piece of the action. The push into these “alternatives” has not come without concerns about an accumulation of unspent “dry powder” in private equity and whether valuations have become stretched. Interestingly, the hedge fund sector, which hasn’t always had an easy time of it in this era of negative interest rates and rises for long-only investors, continues to provide risk-management tools for those willing to shell out those 2 and 20 fees, and the sector may prove some points to doubters next year.
Commodities haven’t garnered much attention by way of noise from the wealth sector this year – oil prices have been fairly steady, for example - although as always, gold and other specialist areas have their devotees. Another trend has been talk/action around direct investing. In the US, and select regions of the world, we have seen family offices, for example, talk about taking direct stakes in companies, either alone or in partnership with other FOs. This soaks up a lot of labour and not possible for all, even the richer, investors. Again, this appears to be a yield-driven play and also motivated by a desire to stick close to areas where families made their original wealth.
Any talk of investments and bubbles has to mention the “B-word” – . (There are a growing number of other digital currencies to track as well.) To say that Bitcoin’s ascent from below $1,000 per Bitcoin in late December 2016 to over $18,000 recently is astonishing doesn’t do justice to language (prices move so fast that this is likely to be out of date by the time this appears in print). Bitcoin is standard fodder for conversations in the bar and dinner table. Opinions vary widely: some firms such as , an advisory firm to wealth managers, predicted that one major private banking house could disappear amid M&A in the next year or so, given the tough competitive landscape. For years, there have been predictions of big consolidation in a famously fractured industry, but that hasn’t quite yet been the outcome.
True, there have been a raft of deals in certain countries, such as Tiedemann’s purchase of Seattle-based Threshold Group in the US (buying an expertise in impact investing), while Europe has seen some middle-sized purchases involving outfits such as pull the plugs on Asian wealth management to some degree.
A continuing trend in several regions, particularly the US and in Europe, and to a certain degree elsewhere, is the intergenerational wealth transfer issue. In the US alone, there is an expected $30 trillion shift from the Baby Boom generation to the younger one; such a shift is thrown into sharp relief by how, at the end of December, US President Donald Trump won his plan to slash certain taxes, such as estate taxes. With parts of wealth management increasingly commoditised, the advisory and goal-setting aspect of the sector becomes more important. We have written this year not just about the younger adult generation and what they want – those “Millennials” – but also about older people and sensitive issues such as cognitive decline and managers’ duty of care. Expect to read more on this in 2018.
On and offshore
The start of 2018 sees more countries come under the net of the Common Reporting Standard, a cross-border set of agreements by countries to prevent tax evasion. International financial centres dislike the term “offshore” but however one describes them, there is continued pressure by large governments, with varying levels of honesty, to demand access to beneficial ownership information on companies, trusts, and others structures. Financial privacy remains a worry; industry practitioners in different parts of the world tell this publication they fear that criminals and corrupt governments (often one and the same) could target the wealthy no longer able to keep their finances private. The effort to balance legitimate privacy against secrecy continues to be a delicate one. But it does appear that offshore financial centres aren’t dying off, perhaps because the benefits of tax neutrality, and the value of international hubs for expat, mobile professionals, far exceeds older tax haven benefits.
Certainly, this year’s Paradise Papers “leak”, following a similar Panama Papers haul of 2016, highlights the boundaries between privacy and the need to avoid public figures stashing money away in secret. With law firm Appleby reportedly suing some UK media outlets over use of information from the Paradise Papers, it appears some in the IFC industry have lost patience and are fighting back.
Finally, with all the talk of robots, Bitcoins and the rest, one trend that seems constant is the need for talented individuals in the industry, such as in the rapidly growing areas such as Asia. Wealth management remains, to use a corny phrase, a “people business” and it seems unlikely that is going to change.