Wealth managers are urging millionaire clients to sell shares and build up cash until stock markets settle and low prices provide new buying opportunities.
The market rout has unnerved some private investors, bankers said on Friday, even though the unfolding crisis seems largely contained to financial markets for now and looks unlikely to impact the still healthy broader economy.
There are always some clients that get nervous, but they are the exception. If you want to make money in equities in the long run, you have to accept some volatility, said Magne Orgland, a partner at Swiss bank Wegelin & Co.
Wegelin has reduced equity exposure in managed portfolios twice within a time-span of two weeks, cutting allocation in a balanced portfolio to 40 percent from 50 percent on July 27, and down again to 30 percent last week.
Rich clients -- often defined as anyone having $1 million or more in free investable assets -- are a formidable force on financial markets, holding an estimated $37 trillion in assets worldwide, a number that is rapidly growing.
Stock markets leapt on Friday after the U.S. Federal Reserve unexpectedly cut its discount rate, saying deteriorating financial conditions were a downside risk to growth.
However, most of this year's gains on equity markets have evaporated, as investors panicked because of fears that havoc in the credit markets in the wake of the U.S. subprime crisis could turn into a global liquidity crunch.
The message to our clients is: 'let's stay calm until we're having some of the heavy fog cleared up and have some visibility on the impact of this crisis, said Laurence Stoppelman, an investment counsellor at Citi Private Bank (C.N: Quote, Profile, Research).
We don't want to be caught up in panic selling, he said, adding that the private bank had not told clients to reduce their equity exposure.
CASH IS KING
Equity markets would continue to be under pressure for up to three months, Credit Suisse said, and it too had cut equity exposure and put the money into cash, to wait until the storm was over and clients could pick up cheap deals.
We want to be on the sidelines in order to act at the right moment. We're seeing a lot of value, but at the moment, the equity markets just aren't behaving rationally, said Adrian Zuercher, an equity strategist at Credit Suisse (CSGN.VX: Quote, Profile, Research).
Banks had been particularly hard-hit by the sell-off, Zuercher said, and the European banking sector was now trading at its lowest multiple in several years and was even cheaper than before a long-lasting market rally starting in 2003.
With credit costs rising, hedge funds and others borrowing heavily to do business would have a hard time refinancing and would try to pull out of highly-leveraged activities, Zuercher said. Some players could even collapse.
Defensive instruments such as gold and gold futures and capital-protected derivatives were another way to diversify and protect money against turmoil on the equity market.
We've taken the view to come out of all pure equity plays, said Kamil Stender, Chief Executive at Helvetia Wealth.
We are looking to build client portfolios into a more defensive battleship mode. Whenever there are stormy waters in the market, sometimes your most prudent action is to pull down the sail and find a port, he said.
Private bankers are seen weathering the crisis better than commercial and investment banks, analysts have said, because they act as financial intermediaries and do not take investment risks on their balance sheet.
Their clients usually have little exposure to the credit derivatives at the heart of the crisis, which found a first high-profile victim when investment bank Bear Stearns Cos. (BSC.N: Quote, Profile, Research) had to bail out two of its mortgage funds.
EFG International (EFGN.S: Quote, Profile, Research) said it had made little shifts in overall asset allocation in the wake of the crisis.
We did however reduce exposure to equities as the Bear Stearns crisis broke, said William Ramsay, Chief Investment Officer at EFG International (EFG.N: Quote, Profile, Research).
We have recently begun very gradually to increase exposure back towards the levels held ahead of the crisis, he said.