Dialogue Summer 2013 Inside: Market Commentary and Outlook Creating a Family Constitution Online Fraud: Using your Email Account to Steal your Identity Horse Racing at Goodwood Schroders Private Banking Dialogue – Summer 2013 Contributors Philip Mallinckrodt Group Head of Private Banking [email protected] +44 (0)20 7658 6969 Robert Farago Head of Asset Allocation Private Banking [email protected] +44 (0)20 7658 6545 Keith Wade Inside: Chief Economist and Strategist Schroder Investment Management [email protected] +44 (0)20 7658 6296 01 Welcome Harry Herbert 02 Market Commentary and Outlook Managing Director Highclere Thoroughbred Racing 05 The Great Rotation... Or is it? Earl of March and Kinara The Goodwood Estate 06 The Next Steps for the Euro Jonathan Riley Partner 08 Why Nations Fail: Michelmores LLP The Origins of Power, Prosperity, and Poverty Suzanne Kingston Partner – Family Law Team 10 Backing a Winner? Join a Racing Syndicate Withers LLP Phillip Gilbert 11 Horse Racing at Goodwood Security Manager Schroder Investment Management 12 Creating a Family Constitution [email protected] +44 (0)20 7658 7992 13 An Alternative Resolution: Jaw, Jaw – not War, War Alan Brown Senior Adviser 14 Online Fraud: Schroder Investment Management [email protected] Using your Email Account to Steal your Identity +44 (0)20 7658 6575 15 Wines to Really Shout About Editorial Contacts Daniel Marinelli 16 Private Banking News Editor Private Banking [email protected] +44 (0)20 7658 3786 Schroders Private Banking Dialogue – Summer 2013 Philip Mallinckrodt Group Head of Private Banking Welcome On 2 July 2013, we announced that we had completed the recommended acquisition by Schroders of Cazenove Capital, which significantly increases our presence in private banking and wealth management. We believe clients in the UK and internationally will benefit from the enhanced opportunities we are now able to offer across investment management, financial planning, deposit-taking and lending services. Our primary focus remains unchanged – from the Thought Leadership debate on the to provide our clients with the high-quality ‘Great Rotation’. Keith Wade discusses the of investment expertise and personalised near term outlook for the euro and what is service that they expect from us. There is needed to ensure its survival. a strong service culture inherent in both businesses, which share an established Jonathan Riley from law firm Michelmores heritage and long-term investment tells us why families are turning to their own approach. We share a common ethos of family constitutions to help structure their excellent client service and as we progress wealth and Suzanne Kingston from with integrating our businesses, we will Withers explains the different alternatives ensure that client interests come first. to divorce litigation through the courts. Lord March shares his passion for the The Investment funds business of Cazenove Glorious Goodwood festival and Harry Capital is being merged into Schroders’ Herbert from Highclere Thoroughbred Asset Management division, adding Racing explains how you can join in the complementary strategies across UK and thrill by owning your very own racehorse. European equities, multi-manager and fixed income and you may see some advertising Regrettably, online fraud is an ever present for the funds business over the next few concern and Phillip Gilbert tells us about months. Private Banking and Wealth the latest developments in identity theft Management clients will continue to have and what you can do to minimise the risk. access to the best fund and investment Finally, Alan Brown gives us his latest wine products from around the world. recommendation to really ‘shout about’ and we also celebrate three members I look forward to updating you on our future of the Schroders’ team who have raised plans over the next few months. considerable money in support of charity. In this edition of Dialogue, Robert Farago Philip Mallinckrodt presents his quarterly Market Commentary Group Head of Private Banking and Outlook and we summarise our findings 1 Schroders Private Banking Dialogue – Summer 2013 Robert Farago Head of Asset Allocation Market Commentary and Outlook A subtle shift in stance by the US Federal Reserve (the Fed) proved to be enough to push government bond prices lower and send yields to their highest levels in over a year. This hit all asset markets, with emerging nation debt markets down sharply, gold suffering its worst quarterly performance since the 1980s and Japanese equities giving up most of their gains since the bank of Japan upped its bond buying at the start of the quarter. In China, slowing growth and a spike in interbank interest rates led to renewed concerns of a credit crisis. 1. Global equities 2. Global bonds 3. Gold bullion Index (rebased to 100) Percentage (%) US dollars 140 4.0 1900 130 3.5 1800 120 3.0 1700 110 2.5 1600 100 2.0 1500 90 1.5 80 1400 1.0 70 1300 0.5 60 0.0 1200 Jul 11 Jan 12 Jul 12 Jan 13 Jul 11 Jan 12 Jul 12 Jan 13 Jul 11 Jan 12 Jul 12 Jan 13 US: S&P500 index US 10-year yield Gold – Price per Troy ounce UK: FT All-Share index UK 10-year yield Germany: DAX index Germany 10-year yield Source: Bloomberg. Past performance is not a guide to future performance. Economic data provided few surprises over the prospect of tighter monetary policy The gold price fell sharply as the rise in bond the quarter. The announcement that upset sent inflation expectations lower. Emerging yields and the fall in inflation expectations markets was Fed governor Ben Bernanke market bonds saw the biggest declines, are both negative for the metal. Other metal explaining how the Central Bank will reduce with local currency debt also hit by falling prices moved lower as forecasts of demand (or taper) its bond-buying programme. exchange rates. fell due to the slowing growth in China. Policy has changed from “we will taper if The notable exception was the oil price, data gets better” to “we will taper unless Equity markets were led lower by emerging which was little changed despite continued data gets worse”. While subtle, this is the markets. Japanese equities soared early in positive news flow on US production growth. first announcement by the Fed that could the quarter as the Bank of Japan boosted be construed as a move towards tightening stimulus more than expected, but gave up The downswing in emerging market asset policy since the financial crisis five years ago. most of these gains as global risk appetite prices extended to currency markets, with turned down. Shares of companies that widespread weakness. Countries such as Bond yields in the US, UK, Germany and offer bond-like characteristics, relatively high Brazil and Turkey, that offer high interest Japan rose to their highest levels in over dividend yields with steady earnings to back rates but run trade deficits, were hit hard. a year, sending prices lower. Corporate them up, suffered as bond markets moved The Indian Rupee hit new all-time lows. bonds also saw negative returns. Inflation- lower. The US equity market fell less than the Commodity currencies, including the linked bond prices suffered bigger falls as global average. Australian dollar and New Zealand 2 Schroders Private Banking Dialogue – Summer 2013 dollar, also weakened significantly. The 4. Japan Economy Watchers Survey Expectations yen weakened over the quarter but hit its Percentage (%) low as equity markets reached their highs. 60 Movement between the US dollar, the euro and the pound were modest compared to 50 the swings elsewhere. 40 UK commercial property prices stabilised 30 after declining modestly since 2011. The London office sector continued to 20 provide the best returns. 10 2007 2008 2009 2010 2011 2012 2013 Private equity investors have benefitted from Diffusion index Source: Bloomberg. the rise in equity valuations over the last twelve months and the increasing availability of debt financing. The level of activity in balance of payments and excessive scenario is that the Minksy moment has remains well below peak levels. In contrast, credit creation. been reached, when income is insufficient to the easing of debt covenants is reminiscent cover the interest due on debt outstanding. of the pre-crisis peak. The recent market falls are not helping This would trigger a financial crisis and a matters. Interest rates are rising just as severe economic slowdown. The economy Trend-following hedge funds suffered growth is slowing. Falling exchange rates is too big and complex, and the data too significant falls as a large number of markets will push inflation higher. Falling commodity unreliable, to be confident of the outcome. changed direction at the same time. Losses prices are bad news for commodity Still, either way, for now slowing growth and over the last week of May and first week of exporters. The one commodity where a tightening credit in China and elsewhere in June wiped out all gains made over the first lower price would prove a boost to the the emerging world is not a good backdrop half of the year. There was no generalised consumer, oil, has proved stubbornly stable. for markets. pattern amongst other strategies although Energy subsidies are both a major cost to few funds proved immune to the widespread a number of governments currently facing Optimism towards Japan has also faded sell-off in risk assets. growing deficits. They are a perverse policy but here we remain more optimistic as at a time when politicians are trying to cut fundamentals remain favourable. Business Outlook carbon emissions. However, it is politically confidence is at a post-financial crisis high In one sense we can be encouraged by the difficult to remove energy price subsidies as (see chart 4).