Dispatch from Geneva

Many Swiss investors are far more focused on the debt markets than equities. Stay diversified

By Kevin O'Leary
Globe Investor Magazine Online, Dec. 2, 2008
Kevin O'Leary is the chairman of Gencap Funds LP, the manager of the O'Leary Global Equity Fund (OGE.UN-TSX).

GENEVA-You have to love the Swiss. They are the world's bankers. There are only six million of them but they keep buried under the streets of Zurich and Geneva trillions of dollars of the world's wealth.

How much exactly? They won't tell you. That's because they are Swiss.

Going into this downturn the Swiss are in remarkably good shape: In October unemployment actually went down in Switzerland, car sales went up and you can still get a home mortgage here for 3 per cent. Yet the Swiss never look inward, their perspective is truly global.

Most asset managers who want to keep tabs on the Swiss perspective do it by phone. They listen to a daily "squawk" box from a Swiss adviser or read a morning market letter that one of the Swiss investments banks publishes.

I don't think that works-when it comes to investing, I am a vampire. I learned hundreds of years ago that there is the information the Swiss will share in a public forum and then there is the conversation you can have with them mano a mano after three glasses of wine. At the O'Leary Global Equity Income Fund, we invest internationally so we need to know what the Swiss are really thinking.

When I come to Switzerland I always make sure I have a reservation at the Aurberge de Dully. The roast chicken there is legendary. Folklore has it that Charlie Chaplin was a regular and that Richard Burton and Liz Taylor had many a fight there after polishing off some of the spectacular white wine cellar housed there (Burton is now buried nearby).

The Aurberge goes through so many chickens I am amazed that I didn't run into Brigitte Bardot outside the front door wearing a sandwich board saying, "stop the senseless slaughter." Regardless, on any given day you can find some of the world's most influential investment bankers and money managers dining there. To unlock their secrets you must first share a few bottles of Swiss Fendant together.

Because we are getting near year end I decided to head over to Geneva this week to get the Swiss investment outlook for 2009. Maybe I should have stayed home. Don't shoot the messenger because I'm about to share with you what I have learned.

Remember that the Swiss think globally so the North American problems that we stay so myopically focused on are just one blip on their radar screens. There are five themes that emerged.

It's not over.

The thinking in Geneva is that we have so far written off $900- billion (U.S.) of a $2-trillion problem. The world is over-levered with complex debt securities that many managers never completely understood. It's clear now that during the euphoric times when CEOs of financial institutions were making money they were greatly underestimating the risks they were taking. One truth remains a constant. When you invest in securities you don't understand you get killed. It took 20 years to get into this mess and it could take more than two years to get out of it. Look for world equity markets to remain extremely volatile.

The European community likes the outcome of the U.S. election but thinks that there is only a 65-per-cent chance of avoiding a really bad recession in North America. If this scenario plays out it will pay to be invested globally because many economies, while still linked to the United States, may fare better.

European banks will continue to cut rates and they are at least 150 basis points (1.5 per cent) behind the United States on these cuts.

This means the U.S. dollar will remain strong until the Europeans have finished making their rate cuts and then the trend will reverse.

Look for the U.S. dollar to weaken materially in the back half of 2009 against the euro.

The picture for the Canadian dollar is not so clear as it has proven itself to be still linked to oil prices. Many Swiss managers are taking the view that oil could trade in the mid-$30s soon before it reverses, a scenario that makes many international investors want to continue to diversify out of the Canadian market until it's clear we are back on the commodity and oil up cycle.

Markets will remain range-bound for all of 2009.

The complexity of the financial instruments that caused this global downturn is unprecedented and as a result the bad news just keeps coming.

The deepening problem at the Swiss bank UBS is starting to smell like Citi, meaning in the weeks ahead the Swiss may have to partly nationalize it, an idea that many Swiss citizens find particularly distasteful. They are looking for heads to roll at UBS AG and just last Thursday UBS management said they would forgo their 2008 bonuses in a bid to try and keep their jobs.

Cleaning up the massive balance sheets of institutions like Citi and UBS means that there could be more selling pressure into equity markets when they rally keeping a governor on the potential of any upside scenario.

Translation, we are going to be very range bound. If you are putting new money to work in these markets you had better be getting paid to wait. Sustainable dividends yields on equities and interest payments on bonds may represent the bulk of returns for the foreseeable future.

Invest beside governments.

Today the capital markets have a new 1,000-pound gorilla and its not private investors-it's the governments themselves providing billions of liquidity into the world's economies trying to avoid a 1930's like depression scenario.

For example this week the Swiss government will provide a $60-billion bailout package for its banking system, a move that could provide a bid for the financial sector that has been beaten up so badly.

In the last few trading sessions, U.S., Canadian and European financial sectors have been extremely volatile, suggesting they are trying to put in a bottom. Anybody who bought shares in Citi last week has doubled their money. Watching the shares of one of the world's largest financial institutions trade like a junior mining stock tells you no one has a lock on what is going to happen next. The only way you could have benefited from this move was to have some exposure to financials because you held a diversified portfolio.

In times like these diversification really matters.

There was nowhere to hide during this latest downturn -even debt investors got hurt.

The average investor has lost between 25 per cent to 35 per cent; more if they were concentrated in commodities and energy. What shocked the world in this downturn was the speed at which it happened; what used to take years to occur happened in weeks. Some bourses like the Russian exchange lost 70 per cent of their value.

When this kind of a dislocation happens investors sometimes become irrational and try and "win it back" by making concentrated bets on sectors or worse individual stocks that they feel are set for a rebound.

I find the Swiss perspective on this point the most important. They have seen this all before. Their attitude is this: get over it, you lost money and its not coming back any time soon.

In 2009 it will not be possible to regain the losses sustained in 2008 without taking on huge amounts of risk. Many of the Swiss investors I spoke with are far more focused on the debt markets than equities. It's noteworthy that many investors here have reset their portfolios with a heavy weighting of corporate debt, expecting these securities to perform better than equities in 2009 in addition to providing a yield.

Now more than ever every investor needs to focus on densification, not just on sectors but also on geography. There is a lot you can learn from the Swiss when it comes to investing. They have tremendous patience.

They know we are truly in a global economy and there is no turning back. Take some time to drink a little Fendant while you plan your portfolio for 2009 and think globally.

Special to the Globe and Mail