Sarasin CIO sees opportunity amid crisis

Burkhard Varnholt predicts that the worst of the global financial crisis will be over by the end of the year and highlights some appealing investment opportunities, including Chinese A-shares, convertible bonds and Asian currencies. He also sees companies from the power, food and water sectors as potential stock picks.

  • 24 Feb 2009
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The worst of the global financial crisis will be over before the end of this year and investors should look to take advantage of some of the biggest investment opportunities in a generation, says Bank Sarasin’s chief investment officer Burkhard Varnholt.

Speaking at a media briefing in Hong Kong today (February 24), Varnholt (pictured below) argued that the cause of the present crisis was lax monetary policy among western nations, with low interest rates propagating asset bubbles, first in tech stocks in 2000 and then in property in more recent years.

This led to hubris among banks and allowed unsuitable borrowers to take out mortgages that were then packaged into structured instruments, says Varnholt.

But while many of the world’s biggest banks have major solvency problems, as seen by discussions about Citi’s potential nationalisation, Varnholt predicted that governments of the world’s biggest economies would not allow any other major bank to fail.

“I have spoken to many central banker governors around the world, and from my conversations with them I have gathered there is a universal consensus that it was a costly failure to allow Lehman Brothers to default in 2008, and no country will allow another [important] bank to fall,” he said.

Sarasin’s CIO said that the US government and Federal Reserve had been very responsive to the bursting of its property bubble, in sharp contrast to Japan, whose weak reaction to a similar scenario in 1989 left the country to flounder in a decade-long recession.

“While the Japanese stuck to the monetary rule book the US have pulled out all the stops,” he said.

Despite faults, the US stimulus package was a major effort to invigorate spending, he said, predicting that Fed chairman Ben Bernanke would focus on keeping the country’s Treasury yield curve “flat on the ground” by buying US Treasuries if necessary. This will help the government to meet its financial needs and fund its stimulus plans.

Combined with the commitment not to let any other banks fail, Varnholt said that there was a “two-thirds chance that much of this monetary stimulus will gain traction in 2009 and 2010”, helping to turn the current financial turmoil in the US into a more standard economic recession, and helping even out the world’s financial markets.

While even a standard recession requires several years of painful corporate downsizing, Varnholt said that there were now some extremely appealing investment opportunities. But he warned: “Thematic asset allocation mattered more in 2008 than any time in the past 20 years, and it will continue to do so in 2009.”

He predicted that government and higher grade corporate bonds would continue to appeal, given still-wide spread levels and the likelihood of a return to financial stability sometime soon. He also highlighted Chinese A-shares, which he says have been oversold, and convertible bonds because of their ability to mitigate downside market risk.

Varnholt also liked the appreciation potential of Asian currencies, with the exception of the Hong Kong dollar against the US dollar given the likelihood that a flood of US dollar fund-raising by the government could lead to the currency losing its value.

In terms of stock investments, Varnholt said good picks would be sustainable companies that don’t suffer from regulatory shifts or the reduction in global overcapacity. He highlighted the power, food and water sectors, since these are likely to benefit from Asia’s demographic shift from a young to a slightly older populace.

As the region’s average age rises, so should average wealth, increasing the demand for power, water and food. When combined with the rising probability of water shortages in China, Europe and the US, Varnholt said that this would lead to the need for desalination plants to convert sea water into drinkable water.

China alone may require more than 400 such plants to meet its needs. The energy requirements of such companies could well hit US$25 billion per year at current prices, meaning a rising demand for power, too.

But while the increasing need to source drinkable water will offer investment opportunities, it could also put pressure on some existing water exporters.

“I was just thinking that [this might not be a good investment] as I said it,” Varnholt said, referring to bottle of European mineral water that he had in front of him.

  • 24 Feb 2009

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1 Citi 68,888.40 314 9.81%
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4 Deutsche Bank 32,702.37 137 4.66%
5 Standard Chartered Bank 30,732.40 217 4.38%

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Rank Lead Manager Amount $m No of issues Share %
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5 Santander 11,584.64 45 8.27%

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1 JPMorgan 26,997.79 92 13.21%
2 Citi 24,968.00 87 12.22%
3 HSBC 17,697.95 68 8.66%
4 Deutsche Bank 10,385.92 29 5.08%
5 Standard Chartered Bank 10,214.05 48 5.00%

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1 ING 3,133.69 26 8.77%
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2 Standard Chartered Bank 5,841.86 48 4.86%
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5 HDFC Bank 2,786.90 77 2.32%