By Tamara Walid
Barclays Wealth's Kevin Lecocq discusses wealth management challenges in the Middle East.
Barclays Wealth's Kevin Lecocq discusses wealth management challenges in the Middle East.
Kevin Lecocq, CIO of Barclays Wealth, talks to Tamara Walid about where he thinks the weakening dollar is heading, the pros and cons of depegging, and the unique challenges of wealth management in the Middle East.
It doesn’t actually matter what we think, but what we think policy people think.
A lot has changed since 1971 when the strength of the US dollar allowed people like John Connally, Treasury Secretary in those days, to say: "It may be our currency, but it's your problem".
Connally's remark was uttered just as the US broke free from the gold standard, consequently laying down a fresh set of rules for international business.
Kevin Lecocq, chief investment officer and head of the Investment and Product Office at Barclays Wealth, recalls the secretary's comment, as we sit on the 15th floor at the DIFC's The Gate, where the bank's Middle East office is located.
And although times have changed, Lecocq believes, some things remain the same - and as the CIO of a wealth asset management company with over US$217bn in assets, he should know.
As from way back, the US runs its monetary policy exclusively on domestic concerns. One is the inflation rate and the other is the unemployment rate. And it doesn't really take other linked currencies much into account in making its monetary policies," he says.
This isn't very surprising. After all, the GDP of the US is around US$13 trillion, whereas Saudi Arabia's is less than US$570bn, even with oil being at US$100 a barrel.
This means that even a 20% plus or minus in the Saudi riyal has barely any effect on the US so when it comes to countries such as Oman and the UAE, the effect is even more negligible. This US attitude, Lecocq believes, is still present today, to some degree.
"Much of East Asia has defector pegs or, as in the case of Hong Kong and until recently Malaysia, hard pegs to the US dollar.
Of course Latin America has had one and that's depegged and of course the Gulf region with the exception of Kuwait is part-pegged," says Lecocq, continuing: "What has happened is that the US is responding to its own domestic problems and subprime crisis, by cutting rates pretty dramatically, and this is not necessarily optimal monetary policy for the GCC, which is experiencing inflation and extraordinary robust growth.
This calls for a balancing act by the monetary policy authorities in the region, stresses Lecocq. On one hand there's the option to remove the peg and run an independent and domestically-focused monetary policy, he says. On the other hand, there are benefits to the peg in that it eliminates the exchange rate risk.
The benefit of the peg on linked currencies is, among themselves, there's really no exchange rate risk.
Exchange rate risk with the US is zero and so there are benefits with cost and so, in doing that, in our own belief, the benefits partly outweigh the costs in terms of trade and capital, in terms of how the monetary policies are engineered," says Lecocq.
A minute later, however, Lecocq is back in reality, recalling that whatever market-watchers thought, what really mattered was the opinion of decision-makers.
"It doesn't actually matter what we think, but what we think policy people think," says Lecocq, who doesn't see any signs of a move from Gulf countries to depeg from the dollar, even after talks in Qatar last November.
Despite being a very difficult shift to predict, Lecocq's experience tells him that the dollar will start to rally this year.
"In fact the euro has run out of steam and the pound is starting to sink a bit.
The current account in the United States is starting to shrink and the bad news is that the US and its cycle is the first one to slow down. Europe will start to slow down a bit later, and perhaps other parts of the world later on, but there's a cyclical element to it.
The dollar's probably pretty close to bottoming out and if the euro sells off into the 1.30s or 1.20s then there'll be even less pressure on countries in the GCC," predicts Lecocq.
The issue of inflation remains, and Lecocq believes that, if nothing else changes policy-makers' minds, inflation will. His gut feeling, tells him, however, "they're not ready to make the move yet". Hypothetically, if Gulf nations were to depeg tomorrow, Lecocq cites a number of advantages, but believes it is not entirely clear whether the man on the street would be better off.
There'd be a real appreciation in currency and so the ability to purchase foreign manufactured goods would go up, so the price of a flat screen TV will go down or stop rising. What may also happen is that interest rates may rise, so mortgages on houses might go up," he says.
As is the case with most economic shifts, lower classes would be affected the most. For example, if a depeg occurs, for a temporary Indian or South Asian worker in the region, the cost of living is bound to go up in rupee terms.
People with US$500m are obviously going to have a very different demand-set than people with US$5bn.
A reasonable step would be a common currency, stresses Lecocq, which he thinks will bring numerous benefits to the region as with Europe's example. That "experiment" has turned out pretty well, he says. Booming inter-regional trade and the region's dynamics at the moment are all factors that make the move possible.
"The fact that GCC countries are currently, with the exception of Kuwait, pegged to the dollar, makes the exchange rate risk minimal but it's more of a transaction cost and that transaction cost would be eliminated by having a common currency. The common currency then could float against the dollar," says Lecocq.
He adds that, in a sense, there is no need for small countries to have their own currency. Countries with less than several million people are most likely better off having a linked currency.
While the future of the dollar peg remains unknown, the present state of the region's stock markets seems to be rather bright, or so thinks Khurram Jafree, director of the Investment and Product Office at Barclays Wealth.
"Overall they're in pretty good shape. What is beginning to happen is that you have an accommodative stance on monetary policy; you have a very powerful backdrop in the region, high oil and gas prices filtering through the entire MENA region, and you have booming trade," he says.
Jafree believes that the combination of all those factors creates "very powerful runners" that are "up there". Valuation remaining "very reasonable" has also been a plus, he says.
When it comes to giving advice in the right direction for wealthy people looking to invest their money, the experts at Barclays Wealth have a process in place. Jafree explains what goes into that system.
"The first principle we work on is that we run multi-asset class portfolios," he says.
This starts with understanding the client's goal, as the nature of a portfolio differs for a client who requires income to that of capital growth. Then comes measuring the extent of risk clients are prepared to take, followed by diversification.
"What we have seen in the last three to four months is that diversification has really played out. For example, if you had your assets in fixed income, certainly the high quality fixed income and equities, portions of equity markets will whack the fixed income.
If you had commodities, commodity markets have done very well," says Jafree, adding that there are several different places to make money at the moment in a risk adjusted manner, with diversification playing an extremely important role.
Does this mean it is "safe" to invest in the region? Not exactly. As Jafree says, the term is relative. Both Jafree and Lecocq, however, admit to loving the economic success stories.
"I might think of it this way," says Lecocq. "We are recommending people outside of the Gulf to invest here very strongly. Then again, whether people here should put all their eggs in one basket is a different story.
While the two financial experts can't help but find the region highly appealing from a macro and business perspective and a very attractive place to invest, where diversification is concerned, it all boils down to the status of the client.
"Some of the clients already have large real estate holdings; commercial, residential or industrial, and to add more geographic risk onto that may not make much sense from a diversification point of view," explains Lecocq.
"In other cases," he continues, "clients have a clear benchmark for their wealth creation. Some benchmark themselves against their equally wealthy peers. If their friends are not expanding outside the region, and if Barclays decides to put them into a global and more diversified portfolio, while regional markets continue to do expectedly well, clients may not be satisfied," explains Lecocq.
"So what we do is we spend a lot of time with our clients trying to understand their benchmark and their mentality and attitude about diversification," he adds.
And after several decades in the region, the people at Barclays must have formed a pretty good idea, especially given the "phenomenal" growth the bank has experienced in the last year and half.
"What we do here is cater to high net worth individuals, which roughly means people with investments and assets of US$1m and more and we've got a variety of bankers. Some of them concentrate on people with US$1m to US$20m, while others concentrate on US$500m and billionaires," says Lecocq.
Among the bank's clients, women make up a high percentage, says Lecocq. In his mind, Barclays Wealth is a friendly open place for women in the region to stop by, talk finance and get advice. One of the main aspects that differentiate Barclays from any other bank, according to Lecocq, is its highly personalised service.
"We have a team of specialists who work with clients as opposed to banks where you get sold a product. What we do is tailor portfolios around individuals. People with US$500m are obviously going to have a very different demand-set than people with US$5bn," he says.
Whatever it is the Barclays team is doing in the region, it is working. In the past year, the bank has expanded its regional staff-base by over 150% and Lecocq expects growth north of 10-12% in the year 2008.
One of the biggest contributors to the company's regional development is what Lecocq calls the "breadth of wealth creation" the region is currently experiencing.
It's one thing when a very tiny fraction of society gets rich, often from extracted industries like oil and gas, and quite another when you have an incredibly powerful and growing upper middle class of entrepreneurs, property developers, big shop owners, manufacturing and software companies, human resource, and consulting," he explains.
Lecocq believes that the amount of "breadth of society" in the region is "incredibly powerful". People with millions of dollars, reaped from building a business over the last six years, and who have very specific demands from a bank for personal attentiveness and service, make up the core client base of Barclays Wealth in the Middle East and the GCC specifically.
"That's why we are growing here quite rapidly ourselves, as are other banks," he says. At present, Dubai is the most rapidly-growing market for Barclays Wealth in terms of staff. Where assets are concerned, Abu Dhabi is the hottest spot at the moment, according to Lecocq.
The way to success, however, wasn't obstacle-free. Lecocq recalls many challenges, and a number are still present.
"The first challenge, which is also an opportunity, is that it's not yet a mature market. You go to Switzerland and you know who the clients and the bankers are.
"It's not that dynamic but it's pretty easy to find your way around. Here, because people got so wealthy so quickly, you don't actually know who all the clients are," he says.
Moreover, it's difficult to land an expert banker in the region, Lecocq complains. This, he thinks, is due to the fact that it's a wealth creation environment, which makes it hard to find best practice overall.
Tremendous growth in the region resulted in demand from banks exceeding the supply of experienced bankers.
Barclays deals with it by finding the best bankers and bringing them into the business, explains Lecocq.
"Partly, it's by bringing people who have language or banking skills from places like Europe into the region, and we're populating our team. Right now, both the challenges and opportunities are almost the same.
"It's a quite far from being a mature market," he says. The markets still have a long way to go in order to mature, but the process is accelerating, believes Lecocq. He sees his client-base expanding and plenty of room to grow and attract more customers.
"What's happened, which is good, is that clients have a very strong and well-defined sense of what they want out of their bank, whereas a couple of years ago it was less defined," he says.
This all paves the way to further regional growth for Barclays Wealth. The trick is to maintain quality control, Lecocq points out. Getting the right bankers, investment specialists and technical people into the business is essential.
Additionally, with an office in Dubai, Abu Dhabi, and Qatar as well as bankers in London and Geneva covering the Middle East region, Lecocq seems to have found the formula for success.