The flight to safety

Written by: Orlando Crowcroft Posted: 19/09/2019

BL64_geopoliticsAsset protection is climbing the agenda for wealth managers as geopolitical developments put clients on edge

It’s difficult to see the world in 2019 as anything but a perfect storm. And with rising tensions in the Middle East, an escalating trade war between the US and China and the continuing fallout from Brexit, it’s a year that could get worse before it gets better.  

But veterans of the finance industry have been heard to remark that they’ve seen all this before – back in the 1970s, when an Arab oil embargo, a devastating US stock market crash and political turmoil in the UK wracked the global economy at the height of the Cold War. 

Then, as now, instability often translates to good business for the offshore finance industry. A convincing case can be made for the world’s wealthy that it isn’t a bad idea to have some assets stashed away somewhere safe when the world goes to hell in a handbasket. 

“We are a beneficiary, if you like, of some of the instability elsewhere. For clients affected, having somewhere stable to go is a massive benefit,” admits Geoff Cook, an independent Director and Consultant. “I don’t think we need to feel diffident or awkward about that.”

Middle Eastern tensions

Many of those clients come from the Middle East where, in 2011, Jersey Finance established an office in Abu Dhabi. Cook, who was Chief Executive at the time, says the investment has paid off. 

Ten years on, with rising tensions with Iran and the conflict in Yemen, Jersey – along with Switzerland – attracts a great deal of business from the region. 

“The long-term trend in that region has always been to create some wealth elsewhere, or invest elsewhere, as a sort of risk-spreading mitigation,” says Cook. 

The way has been forged by sovereign wealth funds in the UAE, Saudi Arabia and Qatar, which have been extremely active in buying up high-profile assets – including London’s tallest building, the Shard – in the UK. Now, as tensions rise in the Middle East, wealthy families and individuals – many of whom were educated in Europe – are doing the same. 

It isn’t just conflicts in neighbouring states that have high-net-worth individuals in countries such as Saudi Arabia looking at asset protection. Crown Prince Mohammed bin Salman’s 15-month crackdown on prominent businessmen in Saudi Arabia – which, in 2017, saw hundreds detained in Riyadh’s Ritz Carlton – has reminded Saudis how fragile the political environment can be. 

“I think it’s fair to say it might have focused people’s minds in a way that it hadn’t until recently,” says Alexa Saunders, a Partner at Carey Olsen. 

Bart Deconinck, Zedra’s Executive Chairman elect, points to another Middle East trend: patriarchs of wealthy Saudi families looking for Shariah-compliant estate planning structures for female children.

It comes as political reforms in Saudi Arabia have ended the country’s restrictive ‘guardian’ system, under which women could not travel without a male family member or husband. The Crown Prince has also ended the decades-old ban on women driving. 

Deconinck says: “Now, the conversation with people from the Middle East is: ‘Can you set me up a structure so my daughters can inherit my assets like my sons can?’” 

BL64_geopolitics2European wobbles

But unlike in previous years, when Middle East-based clients may have seen Europe as a financial safe haven, Europe is looking anything but stable in 2019. In Germany and Holland, far right parties are on the rise – and actually in power in Hungary, Poland and Italy. And the UK under Boris Johnson looks increasingly like it will crash out of the European Union at the end of October without a deal. 

Even worse than a no-deal Brexit, say wealth managers, is the alternative: a left-wing Labour government under Jeremy Corbyn, with the prospect of new wealth taxes and nationalisation. 

Rachel Winter, Associate Investment Director at London-based Killik & Co, says the firm is positioning portfolios away from industries such as utilities, which Corbyn has promised to renationalise. “It is a bigger concern for us than Brexit. The consequences of a Corbyn government would be worse for the market than a no-deal Brexit,” she says. 

One of the biggest challenges in 2019 is the pound, she adds. Traditionally, Killik & Co has invested heavily overseas, benefiting from a weak pound, but with sterling recently falling to historic lows against the euro and dollar, the concern is how far it will go. “We just do not know what’s going on with the currency,” Winter says. 

While the weak pound was initially an upside for overseas investors buying property in the UK, falling residential prices in London have tempered that trend. In July, it was revealed that real estate prices in London had fallen by 4.4% in a year, its biggest decline in a decade. 

As a result, clients have been looking at markets in Sydney, Paris and the US, including Florida, California and New York, says Deconinck. 

More generally, the turmoil in Europe has refocused the minds of high-net-worth individuals away from minimising their tax burden and towards asset protection, should radical changes occur in previously stable countries. 

Deconinck says: “If you had conversations with clients 10 years ago, it was all about minimising their tax burden and estate planning. Today, it’s about topics such as: what if we have Brexit and Jeremy Corbyn? Can I get my assets out of the UK? Can I protect myself against nationalisation?” 

Cook is more bullish, and believes there is still confidence in Europe from international clients. Despite the political landscape, European states are not countries that suffer from high levels of corruption or financial crime, or a genuine risk of states themselves breaking down. 

“They tend to be regarded as fairly sound in that respect, which is why people want to invest in them – because they feel their assets are safe and aren’t going to be misappropriated,” he says. “I don’t think that has changed.”

The US re-emerges

Meanwhile, an unlikely source of positivity in all this turmoil has been across the Atlantic in the US, where, despite an erratic leader, a trade war and one of the most divisive election campaigns in modern memory, managers see a huge growth area. 

It helps that since the Foreign Account Tax Compliance Act (FATCA) in 2010, which instituted automatic reporting of information on US citizens to the IRS, firms are far less likely to become involved unknowingly in handling non-disclosed funds from American clients. 

A lot of advisers used to give the US a wide berth because the consequences of being involved with non-disclosed funds were so severe, says Cook. But the advent of FATCA means that you can now expect to be fully regulated.

Deconinck, for one, believes that the economic state of play in the US has been overlooked as the headlines focus on President Donald Trump’s social media accounts. For his part, America represents a strong market for the wealth management sector going forward, and is where Zedra will be concentrating its efforts. 

“We’ve all been a bit put on the wrong foot with regards to the US,” he says. “It has become energy independent. There is tremendous wealth creation. On top of that, you have more and more people investing in the US, buying real estate there. People see it as a safe haven. If you look beyond all the noise around the presidency, it is a very strong economy.” 

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