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"INVESTMENTS 2010: A TURNAROUND?"

Guest Speakers: Mr. Michael Witschi and Mr. Bernard Schmid Wegelin & Co. Private Bankers, Lausanne

After the most severe global recession for decades it is difficult for anyone to predict what 2010 will bring and whilst most predictions point to continued growth, we wonder how strong and sustainable an economic recovery could be and whether we should be optimistic and invest wholeheartedly or remain prudent?

In true EI tradition, we rang in the New Year with a bankers’ view of the current financial climate, and forecast of the forthcoming economic challenges and their consequences for investors. The EI Committee, joined by an audience of 70 members and guests, were honoured to welcome two wealth management specialists from Wegelin & Co. Private Bankers, as well as to introduce the Bank as our 2010 Platinum Sponsor.

Representing Switzerland’s oldest bank (founded in 1741), our speakers gave a far from “mainstream” presentation, starting with a summary of the mood of Spring 2009, some of the famous collapses and rescues that led to the crisis (Northern Rock, Bear Stearns, AIG, UBS, etc.). It wasn’t until Lehman Brothers’ bankruptcy that the experts began to realise how deep the crisis actually was and led to the Federal Reserve purchasing toxic assets, which has since created a real fear of global debt.

Our Wegelin speakers highlighted how forecasting is both an art and a business, believing that it is more important to focus on “macro-economics” - examining economy-wide phenomena such as changes in unemployment, national income, growth rate, GDP, inflation and price levels - rather than “micro-economics” - analysing the market behaviour of individual consumers and firms in an attempt to understand the patterns of supply and demand and the determination of price and output in individual markets.

So-called Black Swan events should be our main concern. The Black Swan Theory is used by the distinguished professor in risk-engineering and hedge fund manager, Nassim Nicholas Taleb, to explain the existence and occurrence of high-impact, hard-to-predict, and rare events that are beyond the realm of normal expectations. He refers only to unexpected history and regards almost all major scientific discoveries, historical events, and artistic accomplishments as "black swans". He gives the rise of the Internet, the PC, WWI, and the 9/11 attacks as examples of Black Swan Events. Looking at Taleb’s risk landscape, we should therefore focus our attention on the large impact that Obama and other world leaders, as well as other human-interference events, will have on events of large magnitude and consequence and their dominant role in investment portfolios. Although we cannot predict what may happen, we should start making outcome scenarios and investment risk tests to check what the consequences will be for our investments, should certain events occur.

Although huge debt is not new to the US, credit is no longer readily available and tax revenue is more volatile than the correlated economic growth. However, the new U.S. government has promised not to increase taxes: So what else can be done? It’s normal for people to be concerned about bankers’ bonuses and salaries, plagued by two and a half years of economic crisis – some would prefer them to be limited or taxed, which isn’t unreasonable, given that the national treasuries are not only empty but in debt. Nevertheless, this aspect, is all but a small off-shoot of the whole economic problem. Obama is considering introducing fees to banks and freezing government spending in willingness to manage the debt, but in Wegelin’s opinion, this is not a good solution for future economic growth. Wegelin & Co. are currently avoiding direct US-domiciled investments and are looking more at emerging markets and commodities. They suggest four key factors that an investor should take into account: credit worthiness, interest rates, currency relations, legal certainty.

To conclude on a not-so-positive but yet realistic answer to members’ questions about when the worldwide crisis is likely to be over, whether it is already behind us, or if we are heading into an even greater one - it seems it is far from over. The debts are still ever-present (just transferred from corporate to state), as is the risk that we may well see a second, possibly even more serious, crisis. What is worrying is that the world economy is increasingly sensitive to such problems now that the safety-net has gone, and in all likelihood, we risk passing all of this on to the next generation.

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Carol-Anne Schmid, EI Committee Member