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Following are excerpts from a CNBC interview with Huw van Steenis, Global Head of Strategy at Schroders, from the World Economic Forum 2017 with Carolin Roth.
JC: Now I'm joined by Huw van Steenis who is the Global Head of Strategy at Schroders. Huw, great to have you on the show.
HS: Nice to see you, Julia.
JC: We just heard there that Cryan said actually this issue, it's not over. I don't want to talk about Deutsche Bank specifically, but I want to make a contrast between still what we're hearing from the European banks, the optimism that we see on the US banks, and you share that optimism.
HS: Yes, certainly, I mean, meeting the US bank leaders, as I've done yesterday, there's huge optimism about the reflation trade. First and foremost, it's the bump to growth, and an improvement of interest rates. Interest rate rises could add 15-30% to bank stocks earnings in the States. Now, the stocks are already up 30, so there's something else going on. And I think the second thing is the enthusiasm, maybe the high-, peak regulation is probably behind us. It's probably not-, it's not going backwards, but it's not going to carry on ratcheting, and so dividends can restart, buy backs can increase, and it's that greater confidence that investors can come back and really enjoy the benefits of US banks.
JC: So you don't think regulation's going to be pulled back, you just think it stays steady?
HS: I think Basel 4 is going to be significantly watered down, and the reason for that is that we need banks to fuel economic growth. We can see in Europe, it's still very anaemic. I mean, the European Central Bank, I mean, as you know, I felt that negative rates were a really dangerous policy, they're paying banks-, they've offered banks 1.6 trillion. Less than 5% of that has been taken up, and that speaks to the difficulties of European banks. So I think regulation-, there was some recalibration, but we're now looking around, is it working? And let's try and improve what's not, but we're not going to take it a lot further forward, I think.
JC: You said the US banks have rallied 30%, so there's something else going on. So what happens if growth doesn't surprise on the upside in the United States, we don't get the 75 basis points, what kind of downside are we looking at for the banks?
HS: Well, so I think there's two things. I think the-, so coming back to regulation, the uncertainty premium was placed on bank stocks, and they just-, you didn't know what you were going to get back in dividends and buy backs, and I think that's going to-, 2017, the key story will be that regulation burdens ease, and therefore people can look back and say it's a 1x book value stock at least, if not higher. Now US banks are trading about 1.4x book now, there's, I think, further to go, but obviously the rate rises are really critical to what's happening. And the other story, which we've spoken about every year at Davos, I think, is US banks keep on trumping European, and it's a shame that the European banks are slightly more on the back foot.
JC: Okay, I want to stick with the US for just a few moments more. What does all this mean for growth in the United States? Like, give me a ballpark, best case, worst case growth in the United States this year, and what does that mean for the dollar?
HS: So my view is that we're bumping 3.5-4%. I think we'll be bumping up at the higher end of that, both this year and next year, and obviously it depends-, there's a lot of uncertainty. We don't yet know the infrastructure spends, we don't know the tax plans, we don't know the import tax. I was just meeting with two politicians before coming on air who claim they don't know either. And so with a lot of uncertainty, but the underlying dynamism is strong, and what's really striking, meeting the American CEOs here, is how optimistic they are, and if that holds for another three to six months, it becomes self-, it's infectious, it becomes self-propagating, so that's why I still remain quite optimistic about-, and the dollar probably, the dollar probably continues to grind higher, obviously the pound is winging around on Brexit, but I think the pound-, on the whole, the dollar moves higher.
JC: Do you worry about complacency? We always talk about the consensus view here in Davos, and then you go the opposite way. The fact that everybody I speak to believes that the campaigning Donald Trump is not going to be President Donald Trump. Is there complacency here?
HS: Well, so I definitely agree with you that we should always often trade the exact opposite way than the Davos consensus, and you know, the take away for me last year was I was hearing in fintech committees that I'm on, central bankers wanting to eliminate cash so they could put rates more negative, and I went away waving the red flag. I don't think it's quite the same this year, I think the analogy we use is that you know, we invest a lot in emerging markets. When you invest in emerging markets, when you invest in emerging markets, you worry about political risk, economic risk, currency risk. And I think actually we need to use the lens of emerging markets on developed markets, and if you understand that risk premium, then you can still find some great companies and make money.
JC: So talk to me about Europe very briefly, because I know how you feel about negative rates. You're negative on them. I read recently that you'd said you believe negative rates are going to remain in Europe for the next two to three years. Just give me a view on what that means for Europe at this stage, particularly on a relative basis.
HS: Yes. Well, look, so look, the ECB is obviously trying to underwrite the system, and obviously fuel growth. As I said, their funding system is not really being taken up, but the good news is, confidence on European growth and a pickup in inflation means that actually long-term rates are rising, so at least the yield curve is steeper. For the financial system that's a positive, but before you can get rid of negative rates, the ECB needs to taper, and at a minimum that starts next year, so I think it's much more likely that negative rates are still with us until 2019, and that means investors are sitting-, I mean, I speak to a lot of clients, they're thinking, 'How do I invest with this quirky backdrop?' and obviously that's why they're still committing money to markets, multi-asset, fixed income equities, real assets, because they don't want to put the money in the bank.
JC: Top trades for 2017?
HS: That's a great question. Well, we've got-, across the house we've got such a variety of views, but I still think there's an element of some of the US financials I still think offer great value, but actually there's elements of emerging markets. I think coming back to it, though, there's some wonderful companies and what's really striking here is, whilst there's political uncertainty, some of the companies continue to invest, and I'm particularly focused on long-term investing. For me there are some great companies which I've met here, and its' probably that rather than big trades.
JC: Black swan?
HS: Oh, I think it has to be uncertainty-, probably Eurozone-, well, it has to be around the risks from de-globalization, or the risk coming from the Eurozone, and to what extent-, you know, it's possible that more populists in the short-term could actually be positive, but obviously lets' think about Italy, and Italy still (?? 09.53.37) a country that I watch with huge interest.
JC: And the banks?
HS: It's-, do you know what, it's, there's the good, the bad and the ugly, and I think there's just a very mixed bag. At the top end of the European banks, they've been stress tested to withstand huge shocks, have taken on board the message that they need to be more efficient, and have got on top of their problems. The challenge is, we've got a very uneven picture, where some banks still are dealing with issues they should have dealt with a few years ago. So I think the better end actually have value.
JC: Interesting. Huw, great to chat to you, as always. Huw van Steenis is the Global Head of Strategy at Schroders. Louisa, back to you.
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