In an interview with Handelsblatt, Wolfgang Leoni, chief executive of German private bank Sal. Oppenheim, says investors must brace for a very volatile 2016, which will increase the need for derivatives trading – and thereby provide opportunities for professional asset managers.
Handelsblatt: You wrote your doctoral thesis on currencies, so you must have a forecast for the euro or dollar.
Mr. Leoni: I may have written my 600-page thesis on forecasting currencies and used complicated processes such as spectral analysis in the process, but I’m still working on it. But seriously, we believe it is moving in the direction of parity, even if we have perceived a somewhat different direction over the past few days. The entrance into an exit from the zero policy of the U.S. Federal Reserve and the monetary policy of the European Central Bank (ECB) diverging from it will ensure the dollar moves in the direction of parity and strengthen against the euro.
Current forecasts call for a peak season. How will 2016 be?
Naturally, everyone wants to know where the DAX, interest rates and the price of gold will be at the end of 2016. We once showed our clients the banks’ forecasts over the last 15 years, which were the optimistic DAX forecasts and which were the pessimistic and what was the average. When you look at it, you know we don’t need an intense discussion now on where the DAX will stand at the end of 2016. You cannot predict it.
The coming year will be very volatile. What we saw in fluctuations this year was already unusual and likely will continue next year.
All the same, Sal. Oppenheim releases such forecasts.
I always say that’s playing to the grandstands. It has a certain entertainment value, but no informational content you can really orientate an investment strategy on. Forecasts over twelve months are extremely difficult. It is much simpler to give a forecast for ten years.
Because there is a great probability that in twelve months unforeseeable, severe things will happen to drive the market in a certain direction. Naturally, there are such events within ten years but in the long run, they balance out and it’s very probable that positive and negative events will even out. That is why we can say with relatively high confidence that the stock markets in the industrial countries will grow on average by about seven percent over the next ten years, but we have a considerably lower degree of probability where the DAX will be at the end of 2016. That is why we only use forecasts for the coming months in managing our portfolios at Sal. Oppenheim.
Why so short-term?
Because the probability of a severe, unexpected event that takes the markets in a completely different direction is far less in 30 days than in twelve months.
What is your own personal forecast for 2016?
The coming year will be very volatile. What we saw in fluctuations this year was already unusual and likely will continue next year. You must exploit this volatility by correcting the investment concept to use the volatility as a source of return –with options strategies or certificates, for example. Volatility as a source of return will grow in significance, although admittedly, it isn’t easy to manage. The fact that markets have become more complex is good for professional asset managers because do-it-yourself doesn’t work anymore.
Does that mean the motto of the late stock market expert André Kostolany – long only — is obsolete?
Everything that’s closely aligned with a conventional market index –or in an extreme case an exchange-traded fund (ETF) that mirrors it one-to-one — will become difficult. You are buying so-called beta with an ETF, meaning the market performance. But when the traditional investment classes such as stocks and bonds are no longer paying so much, meaning that beta isn’t very large any more, then alpha becomes even more important.
The excess return you generate as asset manager?
Yes. The surplus return through active management will become more important in the future and that is why the wheat will be separated from the chaff in our industry. I am not fundamentally against ETFs. We use them as well to implement tactical decisions quickly. But the actual basic portfolio must be actively managed in the future. Many portfolio managers have been able to profit from the good markets of the past 30 years. Those who have just been swimming along with the market will be weeded out now.
But the market situation is relaxing after the Fed decision.
It is like a soccer match. After the game is before the game. The rise in the interest rate was expected and the market showed some volatility. Soon the discussion will begin again over how things will continue. When is the next step coming? Will it again be 25 basis points? Or, will it possibly be even 50 basis points? This debate will continue. And it will be a very intense and heated debate because it is be marked by a high degree of uncertainty.
We have had no historical experience with the kind of monetary policy experiment we are carrying out at the moment.
Despite the statements by Janet Yellen?
We have had no historical experience with the kind of monetary policy experiment we are carrying out at the moment. We have never experienced such an expansive monetary policy and don’t know what long-term effects it will have or whether the Fed will succeed in extracting itself from this extreme position without market upheavals. Additionally, the U.S. and Europe have never had such a divergent monetary policy as we do now. Again, ultimately we don’t know what that means for the development of yields or for the exchange rate. This increases uncertainty and volatility and certainly will accompany us into 2016 and beyond.
That is quite a challenge for investors.
True, it has gotten more difficult. There will no longer be the nice trends we have had in the past 30 years, in which we have only seen falling yields and rising bond markets. Taking short-term action will become more necessary. Active management of maturities will be more important. Japan is an example. The country had a low interest rate policy for quite some time. But did that mean no one earned any money on the bond market in Japan over the past 20 years? No, there were excellent bond market years during which you could earn six or seven percent return . . . simply because interest rates went down again from a low level between a half and one percentage point.
The only problem is that these movements happen very quickly. We already experienced similar things this year. I have never seen an interest movement in which a ten-year federal bond climbs from zero to one percent within four weeks. Although, I must admit I also have never seen the interest rate at zero. That was a bond crash the likes of which there has never been before.
Speaking of crashes, have you ever fallen on your face with an investment?
Yes, my very first one. It was an option on Siemens I bought. It expired worthless.
So you started out with options?
(laughs) I didn’t have that much money as a student. It wasn’t a big sum. Although 800 Deutschemarks was a lot of money for me at the time. That vanished. So I very quickly brought theory and practice together and learned what the time value of an option really means. Before that I only knew about the theory of such things, then I learned it the hard way.