This publication joined the British Swiss Chamber of Commerce in London for a seminar that zoomed over the economic and investment landscape.
Choyleva responded to Marson’s point about US corporate debt by noting that non-financial firms’ ability to service their debt is fine, but said household debt has fallen to more sustainable levels since the financial crash. The government is also in a position stabilise its debt-to-GDP levels. She also argued that a failing among central bankers in recent times has been to co-ordinate interest rate and other policy on a global basis.
Both speakers said they are concerned about Japan; Choyleva said Japan’s high debt and its heavy QE programme pose high risks, particularly as and when the Bank of Japan runs out of assets to purchase from the banks and will need to start purchasing assets from non-banks.
“Japanese banks are particularly vulnerable to the effects of prolonged QE, a combination of rapidly deteriorating earnings prospects as bond yields fall and loan growth remains structurally anaemic, together with a high and rising level of cash in the economy (cash in circulation is 19 per cent of GDP already, almost 5 times that in the UK or double that in Europe), threaten their stability,” he said.
On other topics, Marson, when considering the UK’s referendum on the EU, said that the UK has the benefit of a “perpetual option” to leave the EU at any time but the present moment is not ideal, given the UK is borrowing heavily and has a large current account deficit. A Brexit vote, and uncertainties around the next steps, will make it harder for the UK to finance that deficit, he said. “The UK needs to attract net foreign capital annually amounting to 5 per cent of GDP or £90 billion, the faintest risk of a wobble in global investor confidence, for whatever reason, could prove extremely troublesome for the UK economy where the household deficit is already near 2 per cent of GDP, the highest level of net borrowing in decades,” he said.
Asked about certain asset classes, Marson said he regards UK equities as cheap in terms of valuation, while the US equity market is pricey at 25 times earnings. As for private equity funds, Marson said supposed diversification benefits are an illusion because net of fees and leverage they typically deliver just small cap listed equity index returns. Moreover, illiquidity is not rewarded. It is costly and illiquid diversification versus a small cap index”
Conversation turned to what is the best model of wealth management firm to put investment ideas to work. Marson and Choyleva both agreed that there are clear benefits to investment being undertaken by relatively small organisations to avoid consensual, crowd-like behaviour. “If you have a huge number of people in an organisation you end up with groupthink,” Choyleva said.
A problem, however, is that smaller wealth management firms are disproportionately affected by regulations. Marson agreed, adding: “There will be more consolidation and it is driven by regulations that are crippling.”