Pulse of the rich

An investment outlook on the markets, and what wealthy investors are really thinking.

Summary: Investment bank UBS notes that its wealthy clients still have substantial cash to invest, and the US stockmarket has further to go. At the same time, consumer research group Ipsos says wealthy investors are more confident in the economy, and have an increasing appetite for risky assets, while Merrill Lynch and research outfit Age Wave have found that affluent Americans are more likely than not to continue working once they reach retirement age.
Key take-out: A poll of 1,200 wealthy UBS clients across the globe revealed that two-thirds agreed global equities would be the best-performing asset class over the next six months. Despite that bullish call, however, a quarter of the respondents still had the largest portion of their portfolio in cash.
Key beneficiaries: General investors. Category: Strategy.

Outlook on the markets

Large piles of cash still sitting on the sidelines are one reason UBS Wealth Management’s CIO Mark Haefele thinks the US stockmarket still has upside. A poll of 1,200 wealthy UBS clients across the globe revealed that two-thirds agreed global equities would be the best-performing asset class over the next six months. Despite that bullish call, however, a quarter of the respondents still had the largest portion of their portfolio in cash, as much as 30% in some cases.

Haefele says that if investor confidence improves, a portion of this idle cash will get redeployed in the stockmarket, driving prices higher. He thinks US equities will return around 7% or 8% this year.

Interestingly, he comes to this conclusion via a cold analysis of the relative health of this bull market. Haefele compares the global stockmarkets’ five-year performance to “artificially enhanced” Tour de France winners. The Federal Reserve and its counterparts throughout the world have, in effect, been pumping the stockmarket full of steroids – and it’s been effective. Global equities have returned close to 100% in just five years.

There’s no point fighting the central banks, Haefele believes. Fed Chair Janet Yellen has acknowledged the pockets of exuberance in biotech and social media stocks, while noting prices “remain generally in line with historical norms”. She has also said that there is “ample slack” in the labour market. Taken together, Haefele thinks the Fed will continue to keep interest rates low for some time. So taking a bearish position in equities and fighting the Fed is, he says, like “taking a knife to a gun fight.”

Furthermore, US valuations are not stretched, he says. The S&P 12-month forward P/E (price earnings ratio) sits at 15.7 times, just a hair above its 25-year average of 15.5 times. Operating margins are similarly in line with historical averages, currently 9.7% versus the 30-year mean of 9.5%.

So Haefele recommends staying overweight US equities and credit, but has halved his clients’ positions in the Eurozone equities and replaced it with an overweight in Canadian equities. He cites the slow to react European Central Bank and sluggish corporate profit margins improvement as reasons for trimming EU positions. Canadian equities, meanwhile, get around 20% of revenues from the US, “making them well exposed” to the continued economic recovery south of the border.

What rich investors are thinking

According to consumer research outfit Ipsos, the conviction that the recession is over hit a new high, with a healthy 45% of affluent and ultra-affluent respondents claiming it is so, versus 21% in August 2010. That compares against 21% of the overall US population in a chipper mood, but both trend lines have been moving up in the past year. Asked a related question, 45% of the wealthy respondents felt very or somewhat optimistic about the US economy.

At this stage in the recovery, it stands to reason that high-net worth types would be feeling better about the US economy than those less gainfully employed. But Ipsos’ analysis suggests there is a steadily increasing appetite for risky assets among the wealthy. An important milestone was crossed last April when gold and stocks traded spots as the “preferred” investment of the wealthy, a reversal of fortune for the gold bugs that were in the driver’s seat during the recession. Stocks have since kept their top spot, with 45% of respondents considering it “an excellent or good investment at this time.” Real estate, meanwhile, had 42% of investors bullish and took the runner-up spot.

That means gold has collapsed from its peak of a more than 50% favourable view in 2011, to a recent post-recession low of 35%. Bonds have moved slightly lower but are generally holding steady at 28%. Our observation: The study plays to Haefele’s point, that growing investor confidence could shift more idle cash into the stock market.

Working in retirement

For the next 20 years, 10,000 baby boomers will reach retirement age each day. This greying of America will radically reshape our economy. A recently published survey on retirement from Merrill Lynch and research outfit Age Wave attempts to dispel the common myths around this demographic trend and life in retirement. The data they sent Barron’s was sliced specifically to help us gain further insights about high net worth individuals in retirement.

There were 780 wealthy respondents in the survey with $US1 million or more in investable assets, ages 50 and older, and the data showed that wealthier Americans are twice as likely than low income folks to work into their retirement years. So while 15% of the “retirees” with less than $US250,000 in assets are currently working; that compares to 33% of those with $US1 million to $US5 million in assets; and 29% with $US5 million plus.

Plus, a full 97% of affluent ($US1 million or more) “working retirees” say they continue to work because they want to. Half took a break from working when they first retired; of those 62% did so in order to relax and recharge; while 41% took the break to figure what kind of work they wanted like to do.


Graph for Pulse of the rich

Why go back to work at all? Staying mentally active was cited six times more than “for the money” as the reason to continue working. Half of the respondents even transitioned to a different line of business, for new experiences and to pursue passions. Work during their retirement years, they say, is more flexible, fun and fulfilling, while 81% said it helped them stay youthful.


This article was first published in Barron’s, and is reproduced with permission.