Andrea Orcel, the experienced president of UBS’s investment banking arm, summed up the global market sentiment in a phrase.
“Nothing is good in general. We are in an environment where nothing is good,” he told Bloomberg’s Jonathan Ferro at a Bloomberg Markets event in London on Tuesday.
The Italian-born Orcel, who got a £17 million-pound bonus on joining UBS from Bank of America Merrill Lynch in 2012, said the average age of his traders is about 30, which means a lot of them have never seen a rate hike or even the sudden huge swings in volatility which have characterised the markets in the past year.
“That of course worries me,” he said.
He deals with it by running so-called “pre-mortems”, which are trading scenarios where some black swan event detonates the market. The results of the test show where the bank is most exposed to losses.
We’re experiencing very low volatility but big whips when something changes. How do you position for that? You have a long period where volatility is very low because of quantitative easing and the whole market, not only investment banks, is pushed to get in even if the risk — reward isn’t right. You can’t always sit back.
Loose monetary policy from central banks have created an asset bubble, where the reward is far higher than the reward implies, said Orcel.
“At some point, it will disconnect and it disconnects very aggressively. And the repercussions are very significant. It’s very difficult to hedge or prepare for that. We can’t take anything for granted. We challenge through black swan scenarios every month, every week, every day” the assumptions holding up the market, he said.
“We try to understand what in our scenarios what is a given, and what happens when it’s not a given when it could cause very significant losses for the investment bank. Rate hikes, big volatility swings are things we try to anticipate and we do that all the time. We try to compensate for lack of experience through a lot of thinking.”
They may be young at UBS, but at least they’re prepared.