Countries that embrace innovation to tackle problems rather than adopt a risk-avoidance strategy will win the economic race in the medium to long term and that's where investors need to position themselves, Pictet argues. We recently spoke to the Swiss private bank about its thinking.

Markets are worried about 1970s-style inflation, COVID disruptions, rising interest rates and Ukraine. And while trying to pick one’s way through these episodes can sometimes be diverting, capturing longer-term growth drivers is arguably what shrewd wealth management is about.

That, at least, was the impression this news service got from an interview with Pictet, the Swiss private bank with a history dating back to 1805. With the perspective of such a long history, Christophe Donay, head of asset allocation and macro research, Pictet Wealth Management, set out his thinking to this publication in a recent interview.

Donay, speaking from his offices in Geneva, thinks that with many of the challenges which are discussed today, such as human-caused global warming, people and nations can be broadly divided into two camps: those who think people must adopt a precautionary principle (avoid all risks where possible) and a pro-innovation, “we can fix this” mind-set. Donay argues that there are certain problems or “negative externalities” that economists have noted down the years and there are two different ways to address these: regulation and tax, on the one hand, and innovation and development, on the other. 

The first set of ideas he associates with the economist Arthur Pigou and the second with those of US economist Ronald Coase. Pigou is best known for the concept of “externality” and the idea that negative externalities – like pollution – could be corrected by imposing a tax. (Hence the idea of carbon taxes, for instance.) Donay’s second viewpoint, about the need to harness markets and innovation to solve problems, takes inspiration from US economist Ronald Coase, who developed ideas about why firms exist, and argued that economists should study real-world wealth creation. Another version is that there is a pessimistic, anti-risk approach, and a cheerier, innovation one. 

With that framework in mind, Donay says a more “Coase”-influenced US, with its strong innovation traditions, contrasting with that of a more small-c conservative Europe, is likely to be a better asset allocation bet for wealth management clients wondering how to surf the waves caused by new and sometimes scary-sounding technologies and challenges. In the short run, though, Europe looks better value than the US because Uncle Sam has already raised rates, while the eurozone is not quite there yet. “We are neutral on US [equities] and overweight on the eurozone,” he said.

“The US recovery is under way….in Europe it has not yet come back to its pre-COVID level. We see some leeway for Europe to close the gap,” Donay said. Pictet has taken tactical moves where required. “This year we have been overweighting Europe, especially the eurozone and especially so versus the US. We still expect the status quo for the ECB on rates despite the ECB having opened the door for a first step later in 2022.”

Further ahead, however, the picture for the US continues to look positive when set against other major countries, he said. 

A “Third Wave” of innovation is coming. This wave is about Nanotech, Biotech, IT and Cognitive Science, or “NBIC.” Donay said. The past few decades have seen a second wave, driven by internet-related developments, for example, he said. 

The world may pause between the second and third waves of innovation and that pause could see volatility and challenges for markets, Donay said. 

This news service chatted to Donay a few days before the Geneva-based group reported a 13 per cent rise in its operating income to SFr3.251 billion ($3.52 billion), and a 75 per cent jump in consolidated net profit to SFr1.008 billion. (The net profit includes an extraordinary gain from the sale and leaseback transaction which Pictet executed during the year concerning its main building in Geneva.)  Assets under management or custody rose by 15 per cent to SFr698 billion at 31 December 2021.

In its 2021 Horizon document examining trends for the next 10 years, Pictet said it did not agree with the claim that the days of high innovation are over, as claimed by authors such as Robert J Gordon or former US Treasury Secretary and academic, Larry Summers. "We do not share this view. On the contrary, we believe that we are currently undergoing a radical technological innovation shock, driven by progress in the Internet, IT and data processing, automation, transport, new energy, life sciences and smart materials. The four characteristics of this radical innovation shock are that it is disruptive, deflationary, global and has exponential effects that materialise over time."