Following are excerpts from the transcript of a CNBC interview by Carolin Roth and Axel Weber, Chairman of UBS
Thank you for taking the time to speak to us once again. Always appreciate it.
If you ask anyone who has been watching the Fed, who has been watching the market they've probably changed their stance two or three times as to when the Fed will hike rates. Now it looks like it will be December, is that your call?
Well I said a couple of weeks ago that the US data was pretty strong and the US economy could stomach a rate hike. We've seen some really very good data come out over the last week, so I think that increases the possibility substantially that the Fed will move, so my expectation still is that we will see a move in rates this year. But then there will be a much more slower and protracted path to normalisation than we've seen in previous cycles so whilst the starting point is an important date, what's more important is the trajectory and that's still not going to be something that will not be, sort of something that will massively re-price the markets. It's largely priced in by now, the Fed will move several times, but it will be a very slow normalisation.
But hasn't Janet Yellen boxed herself into a corner by saying that we'll probably see a rate hike before the end of the year and this is very clearly backed up by the very strong jobs report last week because if there is still a chance we could see a bout of volatility, there is still a chance we could see data taking a turn for the worse in the US.
There is, but there has been a pretty resilient jobs growth and the US has now reached 5% unemployment rate, probably where full employment for the US economy would be for many economies. So fairly good set of numbers, I don't expect, except for quarter to quarter volatility, that trend in the data to be broken and that would warrant a start of a rate hike scenario for the US, and we still…that's our main scenario.
Are you not concerned though about the dissident among the Fed members, are you not concerned about the communication that we've seen from the Fed, because people argue there's been so much flip-flopping, so much back and forth.
Well it's a committee and a committee has different views. That's why it's a committee otherwise you could put a single person in charge of monetary policy and I think it's always good to have a committee. The committee has been deliberating, pretty publically the pros and cons of an early rate hike and they were saying it was data dependent. I think the data now speaks a very clear message and that is that the US economy is quite resilient, there is strong growth in jobs and I think the committee will converge on a view that, in that environment, zero interest rates, which is an emergency level of interest rates, is no longer warranted against the back drop of the data. If they are data dependent I think it is very likely they are going to move.
So you don't think they showed too much confusion over the past couple of weeks? Every Fed member has been speaking out almost every single day, every single week.
Well, if you look at data they usually give you a good signal and there is some noise around that signal. I think there was too much discussion about the noise in the data. Data are not usually in a straight line when they come in, so yes the jobs have been pretty volatile and the jobs numbers have been strong and weaker. The US. Let me remind you; we started the year in the US with a very strong expectation of a very strong first quarter. That got revised with several data revisions, so the Fed is reacting to data and those data aren't never very precise when they come out, but I think the bigger picture that is emerging is a resilient US economy, with strong growth of jobs and an unemployment rate that is close to full employment and I think emergency levels of interest rates, as I said, are no longer warranted and I think that will be the emerging consensus view. It's still good to have a committee in to debate these things but when the data is that clear my expectation is this will form a consensus.
Where does it leave the ECB though? Because does the ECB even have to ease further in the month of December if the Fed actually goes ahead and hikes because the Fed has essentially done the job for them, they've lowered the Euro/Dollar exchange rate already, even though the ECB would never expressly state that this is their target.
Yeah, but I mean exchange rates respond to course of monetary policy and it's been pretty clear that once the US has a tightening bias in monetary policy the ECB and the Bank of Japan both still have an easing bias. And Mario Draghi outlined that the committee seems to think that further action is needed, and since I am not a central banker anymore I don't tend to try, not form a view on what they should do or what they're likely to do, given previous communication I think it's not unlikely that the ECB will add some measures. We at UBS expect a 10-basis point further cut of interest rates at some point, most likely again in December and we expect some prolongation of the current purchase programme. But having said that the current purchase programme is already a very large programme. It's been having an impact on markets and we expect that to impact on equity markets and on the exchange rate in Europe and if the constellation holds with the Fed tightening and the ECB, promising or announcing further easing, the Euro exchange rate is going to start to weaken relative to the dollar. The dollar is going to strengthen across the board, against the Euro and the Yen and that's an environment that will be very favourable to Europe by comparison, but as you said it's not the objective of the central bank to look at the exchange rate, it's a by-product of their decision.
So it will certainly have an impact on equity markets, on Euro-Dollar exchange rates if we see more stimulus from the ECB but what will it really have a sizeable impact on inflation? Because that is something that's been lacking, I know that core inflation has been trending up, headline inflation has been kept low because the lack of commodity price pressure though.
I think both within Europe and Japan in the current environment with commodity prices where they are, even if base effects are going to taper off, it's very hard to imagine that within the next two to three years central banks in Europe or in Japan can drive inflation back to two percent. And I think we are in a week global growth environment and in that environment it's very ambitious to have two percent inflation. You rarely have 2% inflation in a weak growth or recessionary scenario and in the current weak growth scenario I don't think central banks should not be overly ambitious to drive inflation back to 2% within two years. That is probably going to need a lot of additional easing and that additional easing will not really help these economies to grow much faster. A lot of the easing we've seen has had major impact on asset prices and on asset markets, much less on the real economy and employment so what we are seeing in Europe and we at UBS said it about a year ago, we traded our US equity overweight into our Europe equity overweight, because the strong support of monetary policy for equity prices of riskier assets, which is all what QE is about has been leading European equities been up on the year and that support is waning in the US but it is clearly there is Europe and it's there in Japan.
Is there not a risk of a bubble if we keep on easing too long?
Well the real question is does easy monetary policy aimed at solving, not just conjuncturally problems but structural problems does that actually incentivise policy makers to do the right thing or does it risk doing the wrong thing? I think you see a lot of problems, structural problems in Europe. Easy cyclical policy like easy fiscal policy or easy monetary policy doesn't give policy makers the right incentive to do the right thing long term. What Europe has is structural problems and it needs structural policies to fix these issues. First and foremost on the labour markets, there is huge unemployment among the young. To fix that you need the right incentive for young people to move to the job market. And I am not seeing that. Actually good access to easy funding in governments prevents the right policies to be done because central banks are providing governments with easy options. Of funding in the markets without doing the right reforms. And actually long term I think that is a net negative.
I want to move on and talk about the banking sector. You're bank has posted pretty solid results a couple of weeks ago, but what we've seen from many of your competitors (Deutsche for example, Credit Suisse) they're trying essentially to copy the UBS model, something that you have implemented three years ago. Are you glad you did it three years ago?
Well we were looking at the bank and our major strength and weaknesses and we focused the bank on its strength. Our core franchise is wealth management and we're the predominant bank in Switzerland so we put that at the core of our strategy three years ago. In addition to that we have a resilient investment bank that is focused on clients, that is de-risked, deleveraged, and we have an asset management that very strongly supports our franchise value as a gathering business in Wealth management so what was right for UBS at the time, and we were glad we did that early on, was a strategy that is now paying off – for our clients, for our shareholders, and for people working at UBS. I don't comment on competitors and their moves, but what we did was the right thing for UBS and we're seeing that in our quarterly results, quarter by quarter.
But do you think the current market conditions will allow other banks, even if you don't' want to comment on them directly, to replicate what you've been doing or do you think that was a one-time thing because you took advantage of the early mover advantage.
Well we took advantage of our unique selling point which is the global number one in wealth management and a pre-eminent position in the whole market. If other banks had a very similar set-up they could take advantage of that. Now banks, globally, have different areas of strength and weakness and I think the key message that we focused on was focus on your key strength. Focus on what you do best and try and move clients to more of the core of the business model and in Wealth management client focus at UBS is something that makes us very strong, not just against competitors, but globally. And being global is an important part of who we are, because we are a global wealth manager, we can diversify clients from Europe into Asia and the other way around and that globality is very important.
But even you had to push out your profitability targets because of excessive regulation. Because of the fact that interest rates are lower than where people thought they were going to be. Coming back to regulation, do you think it is excessive in Europe? Especially in Switzerland.
No so basically what we did we didn't renege on our targets, what we said was we remain on 15% return on tangible equity target, but since we have to move to a new regulatory environment. Which basically means some additional cost of improving our CET1 ratio slightly and adding additional tier one and tier 2 instruments it means we can achieve those ambitious targets that we have only a year later. But that in my view is just a sense of realism about acknowledging that implementing all the new changes in regulation will take some more time compared to what was previously expected and you rightly said we announced that three years ago. What we did in Q3 was just a realistic view at our core strategy and adjust the strategy to the new reality in regulation and that means we have to push out over time some of our targets but we haven't changed them.
Looking into 2016, and I know you don't have a crystal ball either, but what do you think will be the biggest risk for the world economy and for your clients out there, is it still china? Is it still market volatility, is it geopolitics? What is it?
I think for me the next two years are still under the headline, normalisation. Normalisation we're seeing is in many areas. Take Emerging markets, three years ago EMs were going to be the drivers of global growth. Now the drivers of global growth are the industrialised world, first and foremost the US again. And as the US has turned the page, and as the US is moving to a more normalised environment, including interest rates you're going to see the rest of the world adapt to that. EMS in my view will be quite a volatile asset class going forward. And since monetary policy is taking a different trajectory between the US, Europe and Japan, exchange rates in my view, will be something to watch because I think we will see some major volatility and movements in exchange rates over the next year or two. Nothing dramatically, because of course the course of action of central banks is very muted and a protracted normalisation that will not be fast, half the speed of what we saw in previous cycles, so some asset prices are going to start moving.
The typical risks will continue to be geopolitical risks first and foremost, I mean we talked about Ukraine in the past, we talked about Syria and the middle east now and we talked about the hard landing in China which I think is a remote risk, but it is still something to watch and so you see the normal risk in the global economy, they're going to shift from the industrialised world and from the property markets to emerging markets and to asset classes like high yields, where many of these markets fund.
Finally, given that we are in the City of London here, UBS has a big presence in the City of London as well, how scared are you of a brexit?
Well I was asked that today and actually I am glad you asked that question. Look we think that is absolutely not our main scenario. It's a risk scenario, but we're confident that everyone in Europe and the UK sees the advantages of integrated markets and for us there is a risk, but it is a remote risk that Britain would chose an exit from the EU, but ultimately it is up to tax payers in the UK to take that decision. If it were to happen I am very convinced that rationality would prevail. And rationality prevailing – the UK has been a member of the EU for such a long period of time that they will be able to mitigate the impact of such a decision, if it were ever taken in a rational fashion.
Now it would induce uncertainty for a couple of years, it would increase volatility and I think it might just cloud the picture of growth for the UK and for Europe because this heightened uncertainty is really something that is undesirable. For us as a bank here in London, we are in London for three main reasons, first of all the talent pool. Second, market access to the EU, which is very important and what we do not have, at the same degree from Switzerland. And third, London is a global financial centre. It's a very important hub to be in, even in the same time-zone and Zurich is in the same time zone, it's very important to have this presence in London as a major trading hub. Remember the Euro offshore market all started here in London. And so in all of those three areas, Europe will not be able to replicate those advantages of London within a short period of time and I think it would be undesirable for the UK to give those advantages up anytime soon. So we expect ultimately that rationality will prevail and London will continue to be a big and important location and even if we were to see the unlikely decision that London were to leave the EU, those conditions would stay in place for a fairly long time and mitigate any impact of such a decision.
Thank you so much, thank you.
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