|By Matein Khalid| As a student of investing and the son of a painter/art historian, I cherish art as a visceral, spiritual value but am also intrigued by its historical linkage to banking and the financial markets. The happiest moments of my life have been spent in the Prado, Tate, Hermitage, Rijksmuseum, Ufizi, MOMA, Met, the National Gallery on Trafalgar Square, the Louvre, Musee d’Orsay and so many others. I only understood the relationship between art and high finance after I visited J.P. Morgan’s palazzo in midtown Manhattan, Villa Ephrussi de Rothschild in Cap-Ferrat and the Medici financed palaces, monasteries, chapels and municipals buildings in Florence.
The Medici Bank was the Citigroup/Goldman Sachs of the Florentine Renaissance. Cosimo Vecchio, Lorenzo the Magnificent, Pirro Gordo, Giovanni Medici (who became Pope!) were some of history’s greatest art collectors, patrons of Donatello, Michelangelo, Fra Angelico and Vasari. The Renaissance, Europe’s aesthetic apogee, was unthinkable without the Medici. I used to love to lunch at the dining room at 1 Chase Manhattan Plaza, for the superb views of the East River/Brooklyn Heights but also to gaze at David Rockefeller’s priceless modern art on the walls. It never surprised me that UBS and Credit Suisse are key sponsors of Art Basel or Abraaj Capital’s Prize in Art Dubai.
The art market is white hot for the twentieth century masters. Picaso’s “the woman of Algiers” just sold for $179 million at a Christies auction, six times its price in 1997. A Mark Ruthko listed for $50 million at Art Basel. Economists estimate the size of the global art market at $50 billion. The UAE is emerging as a vibrant new art hub, with Art Dubai, the gallery scene in Al Quoz, the Louvre and Guggenheim and the lovely Sharjah museums. Viewing and buying art is definitely an emotional and spiritual act.
Like the stock and bond markets, the art market has myriad segments, with their own unique metrics of risk, return and secondary market liquidity. The “blue chips” of art are the Old Masters or twentieth century “immortals” like Pablo Picasso, Henri Matisse, Marc Chagall, George Braque or even Mark Rothko, Francis Bacon and Lucien Freud. These painters created works of art that will endure for centuries, whose supply is limited and whose demand is unsatiable. Modernist masters, the Abstract Expressionists and Pop Art greats, Andy Warhol, Jasper Johns, Roy Lichtenstein and Jackson Pollock are also a distinct segment with a global “niche”. Indian artist MF Hussain is coveted by dealers worldwide. Arab. Turkish and Iranian artists are like emerging markets equities, full of growth potential but also vulnerable to price fluctuations due to volatility of demand and liquidity risks. “Flippers” are as hated in the art market as in the Wall Street IPO market.
I have found online databases useful as a guide to art investment strategy. Apart from my mother’s paintings, I specialize in late Ottoman and modern Turkish artists, ideally with Istanbul themes. This is a niche segment but the late Ottoman artists fascinate me because they synthesized avant garde themes from the Paris salons with the local art of Arabia, the Levant, the Maghreb, Anatolia and the Balkans. I acquired paintings of the Grand Mosque in Makkah, Belle Epoque Pera and the minarets of Sultanahmet in winter mist that were painted a hundred years ago. I simply could not write these columns without the Ottoman paintings in my study to inspire me.
Serendipity is often the key to success in art investing. I love exploring art galleries, biennales, art school fairs, ateliers from Marrakesh to Bur Dubai, Beirut to Bastakia. Etchings, sculpture, prints, lithographs, even in my case, ill-fated, Tsarist and Ottoman bond certificates hanging in my study that remind me about geopolitical risk are all labours of love over a collector’s lifetime. The Affordable Art Fair in New York can enable investors to buy works by artist based in Soho and Greenwich Village where I lived in New York during my “Vida Bohemia” salad days, for as low as $5000. There are also “private art banks” that provide financing for collectors, accept paintings as collateral for loans, help assist in provenance and valuations of art works. While not every investor in the UAE has the money or contacts to amass a Charles Saatchi, Baron Rothschild or Francois Pinault scale collection, I believe that disciplined, patient collecting can provide financial windfall as well as the sheer joy of owning a piece of humankind’s aesthetic genius.
Currencies – Ideas and strategies in Asian currencies
The Canadian dollar has tanked to 1.2970 as I write, congratulations to all our friends in Dubai and Abu Dhabi (as well as the Big Guy of Montreal!) who shorted the loonie on my recommendation when it traded at 1.06. Rudolf and Santa obviously loved this macro idea to give us all our Christmas present in July.
I have reiterated my target range on the Indian rupee at 61-64 ad infinitum in the last twelve months, despite the scale of offshore capital flows in Dalal Street after the BJP’s decisive win in the 2014 general elections. I believe 2015-16 will be hugely bullish for India as GDP will rise to 7.5% while CPI falls below 5%, (down from 6.5% in 2012) as the oil/food price slump benefits consumption and capex. This means RBI Governor Raghuram Rajan will meet his 2016 inflation target and cut the repo rate down to 7%. India’s current account surplus has narrowed to only 0.2% of GDP, down from minus 4% during the rupee crisis in August 2013. The $50 billion oil windfall and taxes on bullion imports have worked their magic on the current account. Modinomics reforms will also attract a deluge of capital inflows and FDI. All this means the Indian rupee could remain one of the strongest emerging market currencies against King Dollar, albeit still in my 61-65 range. The Indian rupee is thus a classic carry trade against the South Korean won, the Swiss franc and the Euro. My NRI friends in Dubai in this macro idea are well in the money!
The Malaysian Ringgit is a victim of the oil, LNG, tin, rubber and palm oil weakness. UNMO and Prime Minister Najib Razzak are deeply impacted by the iMDB sovereign fund collapse. Bank Negara will follow an easy money policy as inflation is only 2% and Malaysia is the largest oil and LNG exporter in Southeast Asia. The Malaysian budget deficit could rise to 3.8% of GDP. The latest political scandal has gutted foreign investor confidence in the Barisan coalition. The Malaysian ringgit can fall to 4 against the US dollar by Christmas 2015.
There was a time (2005 – 10 to be exact!) when I used to wax euphoric on the Singapore dollar as the Asian Swissie. No more. Singapore is hugely exposed to China financial market chaos, commodity import appetite and, capital inflows. Southeast Asia’s most overvalued property market has begun to slump. Growth and inflation will both come in below the Monetary Authority of Singapore (MAS)’s target range. This means the MAS will shift its “modest and gradual” 1% annum NEER appreciation path this autumn. Net net, I expect the Singapore dollar to trade at 1.44 – 1.46 in the next six months.
My consistent recommendation for investors to invest in the Taiwan Dollar in 2014 was vindicated in 2015, when the Renegade Province of the Middle Kingdom was the only EM currency to rise against King Dollar, up 4%. The central bank in Taipei is Asia’s only monetarist citadel, though Raghuram Rajan is also a tenured Chicago prof. Unfortunately, Taiwan is exposed to weaker China growth/global tech cycle. This means the central bank (CBC) will not shadow Fed rate hikes this autumn. The result? Taiwan dollar depreciates to 32.
President Aquino’s tax/budget discipline policies and the hottest sovereign credit upgrade story in Southeast Asia made the Philippine peso an Asian currency fairytale. No more. King Dollar and weak exports mean a BSP easy money bias. The peso could fall to 46 in six months.
The South Korean won is a macro disaster waiting to happen, even at 1125. Export/industrial production has begun to slump. The MERS outbreak is a disaster for consumer spending and Japanese/Chinese tourism. The CPI is only 0.8%, far below the central bank tolerance band. Abenomics/yen collapse creates competitive headwinds for the chaebols. South Korean consumers have borrowed 140% of disposable income. Exports have slumped to the lowest level since the post Lehman global recession. It is time to short the Hermit Kingdom’s won for a 1300 target and hopefully eat kimchi all the way to the bank.
Stock Pick – The wealth and valuations of Swiss private banks
My James Bond/Jason Bourne inspired visions of Swiss banking got a reality check once I finally grew up and did business with the temples of money on the Rue de Rhone, Lago di Lugano/Rive Cassrate and the Bahnhofstrasse. Swiss banks also fascinate me as investment options.
UBS is an icon of Swiss banking and the world’s largest wealth manager with $2.3 trillion AUM. The multiple disasters of the Marcel Ospel, Wuffli and Ossie Grubel era included the Dillon Reed in house hedge fund closer, the $50 billion losses in subprime/credit derivatives, a $850 million Justice Department fine for helping US citizens open offshore banking accounts and a $2 billion proprietary rogue trader scandal in London. UBS lost its global reputation as a stolid, conservative Swiss bank in its failed quest to out Goldman as a de facto global hedge fund bankrolled by depositors.
After a period of management turmoil, new chairman Axel Weber (a former Bundesbank President) and CEO Sergio Ermotti redefined and reinvented UBS in 2012. The new mantra was “wealth management is not what we do, it is who we are”. UBS slashed risk weighted assets and 10,000 jobs in its investment bank. UBS stabilized its private bank after a catastrophic 250 billion Swiss francs in outflows. UBS settled litigation (also the LIBOR rate rigging scandal) with regulators in Washington, London and Berne. UBS boosted its Basle Tier One capital ratio above 13% to reassure its private wealth clients. Yet after a phenomenal 2012-15 rerating, I believe UBS shares are fully valued at 1.7 times price to book. UBS is vulnerable to Swiss regulator systemic risk, leverage and ring fencing rules even as its US wealth franchise (the former Paine Webber) manages $1 trillion in AUM. UBS trades at 15.6 times earnings even though ROE is only 10%. There is no longer an asymmetric risk calculus in UBS for me at 21.50 CHF.
Credit Suisse trades below book value, unlike UBS. Former CEO Brady Dugan did not reduce risk weighted assets in investment banking on the scale of post crisis UBS. This is the main reason the board has recruited Tidjane Thiam, former CEO of Prudential, as the next chief executive. I believe the value zone in Credit Suisse is at 25 – 26 Swiss francs or 0.9 times tangible book value. The bank’s Basle Tier One capital ratio is far below UBS’s 13%, making profitability growth and asset sales essential if management is to avoid a capital raise. The management should also circulate a credible strategy for Switzerland’s largest private bank/wealth management franchise after UBS. The Brunetti Commission’s “Swiss finish” regulations on leverage could also force Credit Suisse to boost its capital ratios.
Credit Suisse generated a 9% ROE and the bank’s shares are not expensive at a slight discount to tangible book value, ideally at 25 Swiss francs. The valuation is modest at 9 times forward earnings. However, the bank has underperformed European banking indices in 2014 and the new CEO’s strategic vision is the next catalyst (or not) if the bank shares are to rise to 30-32 Swiss francs.
Julius Baer, Switzerland’s largest pure play private bank, is a far more attractive play on global wealth management than EFG, UBS or Vontobel. In the last decade, Julius Baer has built extensive networks in the Middle East (bought the Merrill Lynch’s private wealth management unit, the thundering herds who once stampeded Bank Street in Bur Dubai!) and Asia. Even though the bank manages 300 billion Swiss francs in assets, it has the potential to increase both EPS growth and operating margins. I was stunned that Dottore Collardi achieved 100 basis points in gross margins in 2015, a tribute to the bank’s growth markets commitment during his tenure as CEO.
Julius Baer trades at a premium valuation of 15.6 times earnings but its growth rate justifies it, since its forward valuation is 13.6. The bank has delivered ROE levels in the 15 – 16%, among the juiciest in global banking. While I am convinced the banks shares can rise to 60 Swiss francs, I would prefer to buy them in Zurich (symbol Baer.VZ) in the 45-46 CHF range during the next global risk asset swoon.