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Investment bank 21 Feb 2018

Investment trends in private banking

The global economy has changed significantly over the past few years, impacting decisively on the style and manner in which investors manage their wealth.

The build-up of debt in the major world economies over the past 70 years, along with the aging population in developed regions, has helped create a new environment and economic reality characterized by:

  • Reduced economic growth and limited inflation.
  • Central bank benchmark rates that are negative or close to zero, a situation unseen since the middle of the previous century.

In addition to structurally zero reference rates there have been other developments such as the low volatility of financial instruments, sustained by central bank purchases in the secondary market, and an upward trend in the main risk assets, such as stocks and low-grade corporate debt.

Impact on investors

One of the first effects on global investors has been the loss or lowering of the perception of risk, in the sense that all financial assets behave favorably, regardless of their quality. Investors have grown used to the idea of the market always going up, or that falls are limited.

The second effect is the change in investor psychology as a result of benchmark rates that are structurally close to zero. This drives investors to see themselves ‘obliged’ to take on greater risks to obtain the same nominal returns, moving the natural risk profile of these investors upward.

There is a third effect on the type of investment strategies most in demand.  In the final phases of a bull market such as the present, active managers tend to offer their clients lower returns that those of the benchmark indexes, as the final phases of the cycle are most sentiment-driven, based on over-confidence, are less rational and less based on valuations. Because of this, many investors opt for buying strategies or passive management vehicles, sparking strong inflows of capital into these vehicles, at the expense of active management.

Duration of these effects

These three effects: the erosion of risk perception, higher risk profile and favoring passive management strategies have been the main drivers of the market in the past few years. As the reasons behind these effects change, we could see a reversal of the situation or a certain return to normality over the next decade.

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