How is the investment process/client advisory business at LGT evolving considering new technologies such as AI?
We look at this topic from several angles. First, the investment process of today and the future must be premised on a deep understanding of market risks in client portfolios. This means that LGT is making sizable investments in the arena of risk management tools. Put succinctly, we need to know what factors are driving the performance of client portfolios and what factors need to be controlled to avoid major drawdowns. Doing so should result in a better client experience over the longer term. Second, we do regular reviews of our strategic asset allocation (SAA), which is the baseline setting for the asset class weights within our discretionary portfolio offering. These reviews are necessary as market conditions change over time and the risk-reward characteristics of underlying assets also change. In other words, nothing is static in finance and new opportunities and risks emerge all the time. By enhancing the baseline SAA with more private market solutions, for example, we aim to smooth out the volatility of client portfolios while not sacrificing on returns. Third, we can say that LGT is both a client and data-driven organization. Over time the application of powerful data analytics and AI-enabled tools results in meaningful time saving for our staff, allowing them to focus on clients more. Boosting productivity is key to making more of what we do scalable, and we better reach more clients, faster and with better investment recommendations. At the same time, we emphasize that the human touch is what makes private banking special. The role of the relationship manager and their proximity to the client does not change as new tooling, data analytics come into the picture. Quite to the contrary, we maintain that the advisory process will be reinforced by the in-depth understanding of how clients are positioned in their portfolios.
What do you expect from 2025 in terms of a financial market outlook?
The advent of another Trump Administration in the US implies a high octane mix of tax cuts, deregulation and increased import tariffs. We already see some of these so-called Trump Trades playing themselves out, for example the recent rally in US small caps. On the currency, this policy backdrop implies that the US dollar will be stronger than initially assumed for 2025, as the US economy essentially reaccelerates. That said, a higher growth environment with low unemployment means that inflation risks may be skewed higher in 2025 as well. It could be that the incoming Administration will seek to boost domestic energy supply and thereby lower gasoline prices, providing relief for consumer spending power via this route. On the other hand, the pro-growth stance may set up a conflict between the White House and the US Federal Reserve in the latter part of 2025, as President Trump calls for lower rates by Chair Powell keep rates steady amid inflation pressures. On balance, we think that a constitutional crisis will be averted with Trump not interfering in the operations of the Fed, but markets volatility may rise as these tensions unfold. Aside from a more volatile policy backdrop, the outlook for US (especially Technology) earnings is robust. While much of the past 2 years saw many market participants make rolling predictions as to when the next US recession would hit, it is now clearer that we are moving into a “no landing” scenario, with growth being bolstered in 2025 by loose fiscal policy and deregulation. Moving away from the US, the outlook becomes more complicated. For one, another popular investment destination, Japan, is challenging given wide swings it the currency. We recommend hedging part of the yen risk but are keen buyers of the underlying index as Japanese corporate profits are booming and the country has achieved sustainable 2% inflation, marking an end to decades of harmful deflation. With regards to China, even before the Trump victory, the bulk of our recommendations were tactical in nature, often playing blue chip single names (or a basket) with downside protection via structured products. That may remain the preferred strategy, especially as the broader market may face headwinds as trade tensions move the next level soon. On fixed income we have been active managers of duration risk this year and will continue to do so as US Treasuries will likely become even more volatile under Trump. In any event, we do not anticipate a “buyer’s strike” given mushrooming deficits, but overall higher yields across the curve can be expected next year. Perhaps another winner of this new environment is Gold, which could continue to shine in 2025, as inflation and geopolitical risks push the precious metal to ever new levels.
How do you manage client risks, given this outlook?
One approach is to buy portfolio insurance using puts and calls (where appropriate and permissible), when such instruments are relatively inexpensive. This can help during market downturns, and we carried out such steps in 2024 in our discretionary mandates. At the end of the day, we think clients’ needs are best severed by opportunistic downside protection trades that forego a small amount of upside, even if that insurance ends up not being needed in retrospect. Beyond this, being adequately diversified is, of course, always important and as mentioned above, the work carried out this year on our SAA review resulted in more efficient portfolio allocations. The general environment next year will require us to be very agile as the policy mix is going to be unorthodox and unpredictable. Quick moves to adjust portfolios in one way or another cannot be ruled out as Trump’s approach tends to be disruptive by design and keeping an open mind on new risks (and opportunities) will be key to meeting client expectations over the coming years.
