Group CIO Yves Bonzon has his eye in the economic and investing environment shaping the next decade. And one thing is for sure, cash is not king.
In mid-March, when the coronavirus outbreak was upgraded to a pandemic and world markets tanked in response to government-mandated economic shutdowns, Yves Bonzon, Group Chief Investment Officer (CIO) at Julius Baer, was taking “a very ordinary approach to an extraordinary crisis.”
“As we experienced exceptionally low market visibility and maximum uncertainty, we repeatedly made the point that the strategic asset allocation is the fallback position of a portfolio, not cash,” says Bonzon, who joined the leading pure Swiss wealth management group in 2016.
At the end of the first quarter, Julius Baer Group made a conscious decision not to mechanically rebalance client portfolios towards their strategic allocations, keeping that option for later.
“The road ahead was expected to remain volatile. In equities, we maintained the bias towards quality and growth companies that had served us well so far. In the emerging markets fixed income area, we continued to prefer hard currency instruments, refraining from investments in their local currency counterparts. As far as the emerging markets equity allocation is concerned, we stick to our concentrated bet on China, which we prefer as a country with the ability to support and stimulate its economy in adverse conditions,” affirms Bonzon, who is also a Member of the Executive Board.
One of the conclusions he drew from the Covid crisis was that it acted as an accelerator for several of their predicted secular trends. “To give you an example, the spread of the virus unsparingly revealed the vulnerability of global supply chains, particularly in the medical field. Amplified by the fact that trade openness was already plateauing before this recession, we expect the decrease in globalization and the value chain shift from global to local to accelerate further.
“Reinforced reshoring movements, in turn, accelerate China’s shift from manufacturing to services and from an export- to a consumer-led economy. Our Secular Outlook views about the decoupling of China from the U.S.-led economic and financial cycle and the emergence of a bipolar world driven by the Sino-American confrontation remain valid. In such a world, holding both Chinese and American assets in portfolios clearly has merits.”
According to Bonzon, one of the unique features of the pandemic recession is that the leadership of the bull market has strengthened, whereas usually the leaders of the rise are also the leaders of the fall. “The five largest stocks in the S&P 500 Index still lead the field in a remarkable way. Admittedly, their business models have held up well and even benefited from the imposed confinement measures, as their latest results have shown.”
The CIO also points out, “The pandemic recession, in triggering the flooding of markets with central bank liquidity, significantly helped to supercharge their valuations. Although free cash flow generation of these stocks is historically unprecedented, current valuation levels leave little room for error in the event of tighter liquidity conditions — unlikely for now — or sector rotation due to a stronger or faster economic recovery than currently discounted.
“From a broader perspective, in the recent environment of low nominal growth and declining cost of capital, the capability of companies to sustain above-average growth rates remains very valuable.”
With the outlook for lower rates for longer and the U.S. Federal Reserve, as stated by chair Jerome Powell, “not even thinking about raising rates,” Bonzon highlights, “There is no alternative to harvesting risk premiums on credit and equities and accepting volatility as low-risk assets are intentionally priced for confiscation.” Staying the course and sticking to secular trend views, such as the rise of China’s capital markets, is the long-term vision. “Active asset allocation is even more difficult than usual in a politically driven market environment. Our tilt towards quality defensive and high-growth segments within equities proved helpful so far, and remains valid going forward. Real assets will significantly outperform nominal assets over time under Modern Monetary Theory macro policy mixes.”
With a degree in economics from the University of Lausanne, Bonzon embarked on his career in finance as a trainee in wealth management and corporate banking at UBS. He moved to Pictet, starting as a junior private banker in 1989 and moving up to CIO from 1998 until 2015.
“My passion remains the same as when I started my career — understanding the complex economic and financial mechanisms at play to help clients navigate the sometimes turbulent waters affecting their wealth,” Bonzon says.
“I have always liked wealth management better than asset management because the former engages with the wealth owner directly, rather than through a professional intermediary. The breadth of investment options becomes much broader.”
"The size of the country and its significant concentration of UHNWIs makes Monaco a core market for Julius Baer,” says Albert Henriques, CEO Bank Julius Baer Monaco.
The bank posted record results for the first half of 2020, with profits surging 43% to $523 million. “Julius Baer has achieved outstanding results due to three factors,” explains Albert Henriques, CEO Bank Julius Baer Monaco. “Our exclusive focus on wealth management, which keeps us undistracted from our clients; our highly resilient organization, agile and nimble in difficult times with reliable infrastructure and excellent risk management; and our very strong business performance in all dimensions, including our ability to take advantage of market volatility.” As of June 2020, assets under management amounted to CHF 402 billion ($445 billion).
Julius Baer Group is present in over 20 countries, and Monaco, where it enjoys a market-leading position, is one of the key locations. As Henriques highlights, “The Principality is an exceptional country in terms of diversity, geography, quality and stability of its institutions and government structure. The size of the country and its significant concentration of Ultra-High-Net-Worth-Individuals makes Monaco a core market for Julius Baer. “We are very proud to see our local office expand and be among the top three banks in the region. Our strong brand, client-centric approach and solid financial base have helped us to capitalize on the expanding market.”