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Sunday, 14th April 2024
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Super rich can take advantage of liquidity crisis Back  
The credit crisis has drained energy out of the wealth management sector. The one bright spot in the gathering gloom is to be found in the super high net worth arena, where activity is better and brighter than ever, a story that tells us a lot about the different mindsets at play. Expect the negative sentiment to hang over markets for the next few months but on a positive note, writes Brian Turley, chief executive officer of Sorrento Asset Management Ltd., ‘we see this process as eventually signalling a turn for the better’.
What a difference a year makes! Certainly true in the case of wealth management. This time last year the industry was in rude health; today, however, much of the energy has gone out of it, drained away by the liquidity crisis and the furtive behaviour of banks in the face of that crisis. It’s no surprise at all that wealth management as a sector has mostly gone quiet. Product is much harder to move and anything with a leveraged angle is difficult to structure because banks are slow to lend.
Bryan Turley


The truth of the matter is that the high net worth individual (HNWI) has shut up shop. And where’s the fault in that? Who but the most intrepid would remain undaunted by the recent pandemonium in credit markets combined with the volatility in equities and the sharp decline in housing construction?

The one bright spot in the gathering gloom is to be found in the super high net worth (SHNW) arena, where activity is better and brighter than ever, a story that tells us a lot about the different mindsets at play. High net worth individuals, in the main, are heavily influenced by sentiment. There are exceptions of course but the generality holds true. And however you look at it sentiment is anything but positive at present in Ireland - a steadily weakening economy characterised by tightening credit and higher borrowing costs, a slowdown in consumption and investment, share prices and property prices on the slide.

High net worth individuals are most affected by this type of market and their general reaction to the circumstances in which they now find themselves is to do nothing. Super high net worth individuals on the other hand view this kind of market as an opportunity; their tendency is to be contrarian and they take the view proactively that with uncertainty comes opportunity. Certainly in our business over the last six months this has become very evident.

Our view in Sorrento is that negative sentiment will continue to hang over markets for the next few months and there will continue to be a stream of adverse news during that period. In a recent Sorrento market comment our consultant economist Ray Bourke made use of a quote attributed to Warren Buffett who is said to have responded to the well-known remark ‘a rising tide lifts all boats’ with a not untypical word to the wise, ‘it is only when the tide goes out, you see who isn’t wearing shorts’.

Certainly in Ireland in the last few weeks anyone paying even cursory attention to what’s been going on in the High Court will be aware that the tide has well and truly gone out and they will have identified by now more than a handful of financial institutions and members of the legal profession who where manifestly not wearing shorts.

Outlook 2008
Over the next few weeks and months we believe that there will follow some more negative and more painful stories such as the above. But we also see this process as signalling a turn for the better. One of the remarkable features of the free market is its ability to clear out, write down and move on. In our view that process is well underway at the moment after a somewhat stuttering start and in a few months time we should begin to see the positives reflected in markets.

The process is already evident as the sub-prime crisis unwinds in the US. Banks have already begun to take the pain of admitting to their losses and writing them off. While unfortunately many people have lost their homes in the aftermath of the crisis, the net effect on the real economy is no longer seen to be of major proportions; the short-term lack of credit as banks react by tightening lending criteria will undoubtedly be overtaken by the longer-term positive of the interest rate cuts now being implemented by the Fed. Hence, although economists in general are predicting a slow start to 2008, many of their number are also looking confidently to a much improved US performance as the year progresses.

We believe that this will be the outcome also in the wealth management industry here. It is our view that the high net worth individuals will be active again towards the second half of 2008 as the positive effect of interest rate cuts in the US and expected cuts in the Eurozone and UK in early 2008 begins to transform sentiment. Some of these individuals are already seriously bottom-fishing for quality shares languishing on low valuations with attractive yields. They know from past experience that it is only a matter of time before interest rate cuts will trigger a healthy rise in equities. But it is the super high net worth individuals who have remained active throughout the crisis that once again will be seen to have benefited the most as their ability to access opportunity and take risks puts them ahead of the market and enables them to make the highest returns on their funds. There is no doubt that a number of these cash-rich investors based in Ireland have already taken full advantage of the weakness of the dollar and the credit crunch in the US to close out deals that would in normal trading circumstances have gone the more facile route of securitisation rather than cash.

Conclusion
The rules never really change. If a person has the capacity to buy high-quality assets, be they equities such as Coca Cola or IBM or properties in locations such as New York or London, and wait long enough - five, 10 or even 20 years – that person will be seen to have made the right choice and will make serious money. I can guarantee that a property in midtown Manhattan will double in value; unfortunately I just can’t guarantee when.

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