Eyes on growth

By Stéphane Monier Chief Investment Officer Lombard Odier Private Bank

This article was first published in Forbes Middle East

The Middle East office of one of Switzerland’s oldest private banks bears little evidence of its 221-year lineage. If anything, Geneva-based Lombard Odier’s representative office in Dubai is austere at best. Yet it embodies the essence of a bank that has deep roots in the eminent European wealth management hub, whilst embracing modernity to appeal just as equally to the wealthy millennials.

Lombard Odier’s ambition to assume a global identity could very well be a timely move in a transforming global economy. Today, the bank is placing its bets where the money is. “If you look at our client base, one third of our clients reside in Switzerland,” says Stephane Monier, Lombard Odier’s chief investment officer. “It doesn’t mean they are Swiss; they can be Indian, English, Argentinian, Saudi, or Swiss. We have one-third of our clients that are residents in other European countries: France, Belgium, the U.K., Germany, Italy, Spain, and then we have one-third that are residing in emerging markets. By emerging markets we mean Latin America, Africa, Middle East, Eastern Europe and Asia. The rate of growth that we have in emerging markets is much higher than the rate of growth we have in the developing world, and that’s because most of the wealth we have now is being created in developing markets.”

Monier’s investment strategy seems to have worked, as Lombard Odier’s numbers have picked up. The Lombard Odier Group’s client assets have grown across all three of their business lines at a global level, comprising private clients, asset management, and technology for banking. As of June 2017, the total client assets reached Swiss francs (CHF) 242 billion ($243.71 billion) while operating profits climbed 5% from the previous year. Consolidated net profit also increased by 13%, the private bank revealed. This steady performance of the family-managed bank is commendable considering the seismic shift it witnessed in its management last year with the departure of Thierry Lombard, one of its partners. The move, observers within the financial services industry noted at the time, threatened the bank’s focus in adapting to the changing industry. A year on, however, such fears seem to have been futile.

Today, Lombard Odier has managed to break out of the mould of a traditional Swiss bank by targeting emerging markets: a move that its contemporaries are yet to fully make. It also helps that Monier, who has an eight-year stint at the Abu Dhabi Investment Authority to his credit, is a staunch supporter of investing in emerging markets. “Ideally it (the exposure of banks to the emerging markets) should be 50%, because emerging markets represent about 50% of the world economy. So it would be logical to invest half your wealth in half of the world economy, right?,” he says. “Actually, nobody does that. In practice, most private banks have an exposure of roughly 8% to emerging markets only, so they are short by 42%.” But that is not the case with Lombard Odier.

Monier proudly points out that the Geneva-headquartered bank is one of the few private lenders that have the most emerging market assets within its portfolio. “We have an emerging market exposure of 15%, which is double our competitors. So it’s already very good, but probably not enough. That’s why I think, structurally, over time, we will have to increase our exposure to emerging markets. And it actually has an influence over how we invest in emerging markets because historically, given that it was such a small portion of our client portfolios, we would only invest into a global fund. As and when our allocation grows closer to emerging markets, we will be able to be more granular in our allocation. We can start investing in Asian emerging markets, or even those in Eastern Europe and Latin America, and we will then have to make relative value comparisons.”

A Fruitful Decade

Lombard Odier’s commitment to the Middle East market has been steadfast. The bank has had a presence in the region for the last 10 years regardless of the economic cycles. Although the regional market has been through the wringer in the past two years, thanks to a freefall in crude prices during the latter half of 2014, private wealth has not taken a precarious dip, according to bankers.

Christophe Lalandre, managing director at Lombard Odier’s representative office in Dubai, notes that the Middle East’s wealthy are increasingly leaning towards diversifying their risks as economic volatility grips the local markets. “It is like having more eggs in different baskets,” he says. “They are quite keen to follow us into different ideas that they had not thought of before when the oil price was high.” But a bank’s success eventually comes down to addressing the clients’ needs, and both Lalandre and Monier are quite aware of that. In the Middle East where family businesses make up such a sizable proportion, Lombard Odier seems to be cashing in on being a family firm. “If you go back to the origin of Lombard Odier as a private bank, they were originally focusing on developing a relationship with entrepreneurial families from France, Belgium, Netherlands and Italy; that’s kind of the bedrock of the company,” Monier observes “Lombard Odier, for example, is a firm that is owned by a few families in Geneva, and we are in the seventh generation of partners. So for seven generations they have passed the company down from one generation to another, and that’s something which our clients quite like, because they have the same philosophy: they have a family business and they pass it from generation to generation, so there is a lot of linkage here.”

Investing Right

As the primary person entrusted with directing the private wealth of Lombard Odier’s clients, Monier is bullish about the investment climate. “We are living in a world where the jobs are not spectacular, but are positive and stable, and where there is low inflation. That’s what we call, in the U.S., the ‘Goldilocks Scenario’, which is very favorable for investment,” he explains. To take advantage of this growth-conducive environment, Monier’s eyes are on the emerging markets.

“We favor European and emerging markets because Europe is later in the cycle, so we want to benefit from the growth that is coming (and we experienced quite high growth in 2017 in Europe). Therefore, we recommend that our investors buy European equities and emerging equities, and we advise them to underweight U.S. equities, because we think the best part of the cycle in the U.S. is behind us.”

“On the fixing (commodities) side, the rate is very low, and we do expect the rate (slowly but surely) to creep up, especially in the developed world, so we are proposing that our clients underweight or sell all their government bond exposure, and that they invest: whether in high advance (as the level of default we’re experiencing in this sector is very low), or in emerging markets in local currencies. So one of the other things that we are very positive about is emerging markets, whether on the fixing side or on the equity side.” Monier says that the emerging markets have not seen a good run between 2012 and 2016, but he is convinced that it is changing for the good, with the tide turning positive for these markets. “Their assets are valued very cheaply compared to the developed world, and we think there will be growth differential between emerging markets and the developed world of at least 2-3% Going forward, that’s going to guarantee better returns when investing in emerging markets, particularly when compared to the last four years.”

Although Lombard Odier’s clients might not disregard the traditional advice of investing in equities and other growth areas, they too are not immune to new investment streams such as cryptocurrencies like bitcoin and Ethereum. Upon being asked if Lombard Odier’s clients have shown an interest in bitcoins, Monier nods surreptitiously. However, much like traditional financiers, he is quick to point out that cryptocurrencies might not survive for long, thanks to their volatile nature. “The attraction of it is that there is a limited amount of bitcoins that will be issued. So basically you create a scarcity where the price goes up, and if the central banks are putting a lot of liquidity that helps the price go up too. So be careful because the central banks are going to remove some liquidity. And it has also gone from $800 to $6500, and sometimes $6000, it hasn’t been a straight line—it’s been a volatile path. Most cryptocurrencies are very volatile so our advice is that our clients tread carefully on this.”

But Monier is refraining from cautioning clients against a blackout on any investments across the digital platforms. A particularly growing area of focus, according to him, is the electronic payments sector. “The recommendation is to invest in companies that are at the cutting edge of the electronic payment system revolution,” he says. “We are lucky that in Lombard Odier we have primary research on equity, and we have a technological analyst that comes up to us and says, in the electronic payment system I recommend those four companies. This is what we recommend our clients to invest in rather than bitcoin companies, because this is more likely to be a profitable investment in the long run.”

With economic sentiments changing so rapidly across the globe, Monier could very well be right.