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."