Itay Tuchman, head of markets for Citi in Australia, is still bullish on global investing despite the current turmoil in international markets.
Citi no longer does any proprietary trading, but instead runs deals on behalf of its institutional client base.
In a wide-ranging interview with Banking Day, Tuchman began with the turmoil on Chinese equity markets.
He said the catalyst was likely to have been the devaluation of the RMB, "which this month was really the surprise event."
"That said, this is August which is typically a very illiquid month in financial markets anyway as most of the market participants in the northern hemisphere are taking their summer holidays."
"Now that we are reaching the end of August, start of September, it'll be interesting to see if liquidity comes back into the market. My sense is that asset valuations haven't been, quote, 'cheap'," he said.
Tuchman puts this down to a number of factors, none of which is conclusive on its own. They include:
- the change in the role of banks as intermediaries as a result of regulatory pressure such as the US rules under Dodd-Frank and Volcker;
- changes in underlying constraints, such as balance sheet utilisation that global banks have;
- the role of non-bank intermediaries, high frequency traders and others participating in the financial system, that make markets more liquid in normal times but in times of stress may not be there to provide the same kind of liquidity that banks have typically provided in the past; and
- investor behaviour and the crowding of investors into the same sort of trades, largely because of tightening in central bank regulation around the globe limiting the diversity of investment.
This has resulted in, to some degree, a repricing in equity markets that has made dividend yield look very attractive, Tuchman suggested.
"If you look at, for example, offshore investors into Australia now that the currency has declined, it's been 30 per cent cheaper to buy Australian equities for offshore investors, so we can expect to see a lot more interest from most types of investors looking to buy very high quality high yielding assets," he said.
When it comes to the exchange rate, Tuchman says he has been telling his institutional clients to expect the Australian dollar to continue to decline as a result of the expectation that US interest rates will start to rise in September or later this year and commodity prices will continue to weaken. The house view at Citi (which is, in other words, its advice to clients), is therefore that the Australian dollar still has some room to fall.
Then there is the perennial question of Australia, or more specifically Sydney, as a regional financial centre.
Tuchman is positive on the outlook, saying "if Australia plays its cards right, from a public policy, government and regulatory perspective, and is smart about developing as a financial hub, particularly in asset management, if the superannuation industry continues to grow at high levels Australia, it could become a very dominant asset manager for the rest of Asia."
He said Australian financial services firms needed to keep that potential in mind over the next five or ten years, to engage offshore and make sure their intention was not just to brand themselves but also to really build their understanding of the needs of global investors.