Opportunity knocks as bottom looms

Glenda Korporaal | November 24, 2008

IF history repeats itself, now is the moment when a lot of investors will amass great fortunes, UBS wealth management head Liz Cacciottolo says.

By last week, "the general feeling from clients was that it has got to such extreme levels that value is there, and we saw a bit of cautious buying", she says.

"History shows that bear markets and times of extreme dislocation provide the greatest opportunities," says Cacciottolo, who has headed UBS's wealth management division in Australia for the past three years, providing advice to some of the country's wealthiest individuals.

"Some of the major fortunes have been made in these periods in the past.

"If you look back at the cycle, some of the people who are wealthy today have become so because of actions they took in the 1990s or even the 1970s," when they were cashed up.

"Having some ability to seize those opportunities -- having cash and not being fully invested -- is important."

But she says private investors will not begin seriously buying until the markets settle. "People have been a bit surprised at the relentlessness of the downward move, some are shell-shocked.

"The markets are really discounting extreme scenarios at the moment. When you get to this stage in the cycle, the price behaviour is clearly driven by sentiment rather than valuation, because liquidity has moved out.

"Some investors are buying at these levels but investors are looking for a greater period of stability to build confidence."

A UBS veteran and mother of three boys, Cacciottolo spent 17 years working with the bank in London, including the last five years building up its British wealth management division at a time when it was aggressively seeking to expand.

In one three-month period she interviewed more than 400 people in London because of the rapid expansion.

When she left to come back to Australia in 2004, the division had more than 900 staff and $50 billion in assets.

She says many fortunes have been made in highly volatile markets and in market downturns and the current volatility may provide opportunities for some of Australia's most wealthy individuals who are not geared up.

"Deleveraging is taking place. Our typical client tends to be a longer-term investor" without too much leverage. The problems arise when people have borrowed against individual stocks, "particularly if they are an executive, and their wealth has been tied up an individual stock and that stock has dropped dramatically".

"But in these times of extreme distress and dislocation our wealthy clients have made a lot of money. They were able to spot an opportunity when it came along." In the 10 years until 2007 private wealth per person in Australia grew at an annual rate of 11.4 per cent to $362,000, with 10 per cent of 8 million households having assets of more than $1 million, according to information compiled by UBS. Of these, 215,000 household had net worth of more than $2 million.

The growth in wealth in Australia, she says, has come from a combination of increasing investment in superannuation, entrepreneurs who have built up businesses and sold them or listed them on the ASX, and investors who have been investing in the stock market for many years and taken profits along the way.

"A lot of the pain and the issues coming up are for those who have entered the market in the last year or two," she says.

"A lot of the clients we deal with have been investing in the market for 10, 15 or 20 years."

The wealth figures have yet to be revised for the impact of the stock market crash, but the downturn will have very different effects on individuals' wealth, depending on debt and exposure to equities.

Cacciottolo says wealthy Australian investors have tended to be more focused on share market investments than their British counterparts, and were prepared to gear up more.

"I find investors here more focused on equity markets and more leverage tends to be used by private clients in Australia because some of the tax benefits are there," Cacciottolo says.

"In Britain they tended to use hedge funds a lot more than we have.

"People tended to use alternative asset classes, including property and commodities, whereas in Australia a lot is wrapped up in the equities markets.

"There are a lot more financial incentives to invest in equities in Australia, such as franking credits, compared with Britain."

Cacciottolo says some clients have been "cautiously looking at adding certain things" to their investment portfolio.

"But it needs the market to settle a bit for people to start making real decisions.

"This extremely volatile market whipsawing around tends to be unsettling for everyone."

Cacciottolo, whose mobile phone rang several times during our lunchtime interview, says her wealthy private clients are keen to keep in touch with their advisers, and talk about what the market is doing, even if they are not buying.

"Things have been moving so fast it is hard for people to digest the volume of information," she says.

"A lot of the time it is just about being able to talk through what is happening in these uncertain times."

Cacciottolo says the sharp fall in the Australian dollar might help the economy by making Australian exports cheaper.

This could help the economy get through the crisis in better shape than some other economies, as during the Asian crisis in 1998.

History shows that some of the sharpest rises in share prices come after a very sharp fall, she says.

"When you have these down years, you have quite significant rises afterwards," she says.

"If you didn't get out of the market some time ago, it's probably not a good thing to capitulate now at these levels, because you can't afford to miss out on the kind of recovery which could happen shortly after."

The end of the affair

Nov 20th 2008 | WASHINGTON,

America’s return to thrift presages a long and deep recession



DEBBIE JEFFRIES could see it coming. When she manned the cash register at Linens ’n Things, the household-goods chain where she has worked for 14 years, a customer would sometimes open her wallet and display 15 credit cards. “That people can pull out that many credit cards—that’s insane. You say, whoa, maybe that’s why we’re here. We have so much debt.”

Ms Jeffries cut up her own credit card several years ago when the balance became unmanageable, but still became an indirect victim of the credit crunch that is now dragging America into recession. Linens ’n Things filed for bankruptcy protection in May; in October, unable to find a buyer for its stores, it began to liquidate itself. A sign in the window of Ms Jeffries’ store in suburban Maryland invites anyone interested in buying the fixtures to see the manager. Ms Jeffries expects to be out of a job by the end of December.

An important reason why the American economy has been so resilient and recessions so mild since 1982 is the energy of consumers. Their spending has been remarkably stable, not only because drops in employment and income have been less severe than of old, but also because they have been willing and able to borrow. The long rise in asset prices—first of stocks, then of houses—raised consumers’ net worth and made saving seem less necessary. And borrowing became easier, thanks to financial innovation and lenders’ relaxed underwriting, which was itself based on the supposedly reliable collateral of ever-more-valuable houses. On average, consumers from 1950 to 1985 saved 9% of their disposable income. That saving rate then steadily declined, to around zero earlier this year (see chart). At the same time, consumer and mortgage debts rose to 127% of disposable income, from 77% in 1990.


Those forces have now reversed. The stockmarket has fallen to the levels of a decade ago. House values have fallen 18% since their peak in 2006. Banks and other lenders have tightened lending standards on all types of consumer loans.

As a consequence, consumer spending fell at a 3.1% annual rate in the third quarter (in part because tax rebates boosted spending in the second), the steepest since the second quarter of 1980 when Jimmy Carter briefly imposed credit controls. More such declines are likely to follow. Richard Berner of Morgan Stanley projects that in the 12 months up to the second quarter of next year real consumer spending will fall by 1.6%—a post-war record. “The golden age of spending for the American consumer has ended and a new age of thrift likely has begun,” he says.

Even before this crisis hit, saving was bound to rise. Baby-boomer Americans have saved far less than their parents, according to McKinsey Global Institute, the consultancy’s affiliated think-tank, and are unprepared for retirement. Drawn out over many years, a rise in saving would be a good thing. But compressed into a matter of months, it would be downright dangerous. But the possibility cannot be dismissed. Bruce Kasman and Joseph Lupton of JPMorgan predict that the saving rate will jump to around 4.5% by the end of next year, the sharpest jump in so short a time in the post-war period.

Patricia Baker, a part-time hostess at a Maryland country club, is spending $1,000 on Christmas this year compared with $3,000 last year. She worries about the economy. People at the club still play golf, but instead of ordering lunch and a beer, many just buy crackers and a soda. She also has less to spend. Illness kept her husband off work for a bit, and they fell behind on payments on their two credit cards. The credit-card company docked his wages to pay off the first, and she is still battling over the second. She expects her monthly mortgage payment to reset next year from $1,700 to $2,000 or more, and doubts she can find anything better: “Banks aren’t going to touch anyone that doesn’t have perfect credit.” She now pays cash—as she did for two pillows in the Linens ’n Things closing sale.

This compulsory return to thrift will be deeply painful; consumer spending and housing are almost three-quarters of GDP. Of the 1.2 million, or 0.9%, decline in jobs since December, about 700,000 are directly related to consumers: retail trade, transportation manufacturing and home-building. The rise in unemployment, from 4.4% in 2006 to 6.5% in October, is nearing that of 2001-03 and is not over. On November 19th Federal Reserve policymakers disclosed they expect the recession to last until mid-2009. Their inflation worries have evaporated; indeed, consumer prices plunged a record 1% in October from September, and by 0.1% excluding fuel and food, the first such decline since 1982. The Fed’s vice-chairman, Donald Kohn, said outright deflation “is a risk out there but it’s still small”.

The risk is that the recession will be longer and the recovery weaker than expected as consumers retrench. Until 1982 recessions were often induced by the Fed to weaken demand and reduce inflation. Declines in GDP were dominated by business inventories and interest-sensitive spending such as cars and houses. Once the Fed eased money, spending sprang back.

Since then inventories have become less important to the business cycle and deregulation and financial innovation mean higher interest rates take longer to affect spending. Expansions are marked by sizeable growth in assets and debt. When the cycle turns, falling asset values and debt reduction weaken the kick of lower rates, producing anaemic recoveries with rising unemployment. The Fed has already lowered its interest-rate target to 1%, but it is fighting gale-force headwinds as lenders reduce their loan portfolios. Citigroup recently told many of its credit-card holders that it was raising their interest rates by up to three percentage points.

Lenders once routinely pooled credit-card, student and car loans into securities and sold them to capital-markets investors. Joseph Astorina of Barclays Capital says no one wants to buy such securities now for fear that some overextended investor will dump its own holdings a week later, driving their values down sharply. The issuance of credit-card-backed securities, which averaged $8 billion a month in 2007, was zero in October, he says.

Alan Greenspan, the former Fed Chairman, told The Economist this week that banks were satisfied with capital equal to 10% of their assets in the past. Now, to soothe depositors and investors, they will need a much higher ratio—perhaps around 15%. Until they get there, through a combination of raising new capital, reducing dividends and share buybacks, and shedding assets, lending will be constrained.

This makes a strong case for more government stimulus. Lawrence Summers, the former treasury secretary and a candidate for the same post under Barack Obama, said on November 17th that it should be “speedy, substantial and sustained over a several-year interval”. Fiscal stimulus at this stage would replace some of the demand which has been wiped out by the credit crunch. It won’t prevent a recession; but without it, the recession is guaranteed to be far worse.

Boom turns to gloom as crisis hits Dubai

Fri Nov 21, 2008 9:12am EST Dubai shopping spree stalls, retailers tighten belts
21 Nov 2008
Dubai distressed property sales rise as crisis bites
21 Nov 2008By Thomas Atkins - Analysis

DUBAI (Reuters) - The seaside emirate of Dubai shifted into crisis mode this week as its breakneck building boom stalled, its lending bonanza evaporated and the government pondered wider steps to rescue banks.

Dubai -- self-styled bling capital of the Middle East, nightclub hotspot for the teetotalling Gulf and home to the world's tallest building and biggest mall -- has gone pear-shaped.

"It's gotten pretty ugly out there," analysts at Nomura Investment Banking wrote in a note this week, describing Dubai's property market as "a full-scale frenzy in which speculation went largely unchecked until it was very late."

The result may be a new business model for the emirate, one based less on debt and speculation.

Dubai's response is now being hammered out by a committee of business and government leaders charged with steering the emirate through the crisis and perhaps throwing its high-debt business model out the window.

Big developers have started firing staff and paring projects, banks like Emirates NBD ENBD.DU have blocked consumer credit to employees of companies at risk, and at least one major mortgage company has stopped lending altogether.

"Lenders blinded by rising oil prices and borrowers spellbound by easy returns have helped build a mountain of private sector debt in parts of the region that has generated an illusion of excess and abundance," Nomura said.

Now, investors fear that individuals and corporations alike will have trouble paying back Dubai's non-bank foreign currency debt estimated at just under $70 billion, according to estimates by ratings agency Fitch.

Shares in the region have lost around $1 trillion since the beginning of the year as investors fled. The UAE finance ministry said last month it would inject 70 billion dirhams ($19 billion) into the banking system, and is already looking at doing more to keep interbank liquidity flowing.

Many had hoped that the six countries of the Gulf Cooperation Council (GCC) would escape the crisis due to their massive current account surpluses from energy exports.

"Dubai is the most vulnerable, as it has little oil and has been booming on the oil surpluses from the GCC, Iran and Russia," said analysts at Citibank this week.

DUBAI INC.

Dubai Inc. -- the name applied to the emirate because it is run more as a business than a state -- now faces a major overhaul and has taken on teams of consultants to advise on how it might reshape itself in an era of weaker credit, rising competition, falling speculation and narrower profit margins.

With barely any oil to call its own within the loose UAE confederation, Dubai made its bid for fame by housing banks, retail, media, shipping and logistics enterprises and by billing itself as a safe haven in a volatile region for investors.

Post-crisis, banks and property firms are likely to merge, developers retrench, and the wild culture of speculation grow tame.

"The solution is a comprehensive effort to consolidate the myriad of companies that make up Dubai Inc.," Citibank said.

In addition, some suggest that the monetary regimes in the Gulf -- all, except Kuwait, which peg their currencies to the dollar -- may need to restructure as floating regimes instead, a move likely to spur decades-old goals of monetary union.

Few anticipate default given the widespread view that Dubai is too big to fail and the implicit support provided by its neighbor Abu Dhabi -- home to the largest sovereign wealth fund in the world, ADIA.

"We believe Dubai will pull through with some help," Citibank said.

But with the cost of credit for the Gulf's top 22 financial firms rising from 30 basis points over LIBOR in early 2007 to around 200 now, many expect Dubai's spree to halt, plans to be swept from the drawing board, and existing projects to struggle.

The result, in the end, may be the sustainable growth model that Dubai has sought all along.

(Editing by Chris Wickham)