Introduction

There are conflicting views among wealth managers and economists, as well as in the media, about the extent and duration of sub-prime mortgage defaults and the resulting credit squeeze. Datamonitor predicts that the impact on financial services will be significant, and will last through 2009. We have produced a series of reports to identify the strategies to help them insulate their revenues.

Scope

DATAMONITOR VIEW 1
CATALYST 1
SUMMARY 1
ANALYSIS 2
The majority of wealth managers are not concerned about the risk of a global economic downturn 2
There are two broad schools of thought on the economic outlook for the next two years 2
Very few wealth managers acknowledge that a market downturn is on the way 2
Datamonitor believes that 2008-09 will be characterized by struggling economies worldwide 3
Rising interest rates, excessive borrowing and negative savings rates have combined in a perfect storm that will shake most of the world's economies 3
The widespread securitization of loans will compound this problem 4
Consumers were not alone in overextending themselves; state debt servicing is up against budget, while tax revenues are sharply down, which may signal a muni bond crisis ahead 5
The US economy is not healthy enough to 'expand' itself out of these conditions 7
Foreign direct investment may also boost the economy; unfortunately foreign investors have run for the hills 7
A continued Treasury sell-off may further depress the dollar and, at worst, force interest rate hikes 8
Another major terrorist attack in the US will destabilize the economy further 9
Market capitalization, to varying degrees, will fall worldwide as US stock markets continue their jitters 9
Communication, risk assessment and effectively marketed products will be the keys to success in the downturn 9
A structured communication program should have already been implemented to address customer concerns about market volatility 9
Risk assessment is more important now than ever 9
The potential to deepen share of wallet is significant 10
Risk-averse clients will demand insulation and reassurance from the downturn 10
Clients will be tempted to hold investments in cash 12
Risk-loving clients should be encouraged to see the opportunities in volatility and in mis-matches 13
Product development will be a combination of new launches, and intelligently marketed existing products 14
The lending side of the business will also be important as re-mortgaging opportunities will abound when rates come down 15
Wealth managers who don't anticipate client needs in the market recovery will lose them 16
A shift back into stock market-related investments should be marketing-led, not client-led 16
As the market improves, clients will again want more say in their investments 16
The best client managers will be poached from those wealth managers without a retention plan already in place when the market improves 16
APPENDIX 18
Definitions 18
Currency peg 18
Exchange-traded fund (ETF) 18
Guaranteed fund/ Capital-protected fund 18
Risk tolerance 18
Uncorrelated investment 18
Methodology 18
Further reading 18
Ask the analyst 19
Datamonitor consulting 19
Disclaimer 19
List of Figures
Figure 1: US troubles have spread to the rest of the world 2
Figure 2: Less than 10% of wealth managers were most concerned about a potential recession as of September 2007 3
Figure 3: General obligation and revenue muni yields have increased in recent weeks, while Treasury yields have decreased, indicating a shift from munis to Treasuries 6
Figure 4: The US has run a trade deficit since 2001 7
Figure 5: US dollar exchange rates have fallen against the European currencies since the last market downturn 8
Figure 6: Net assets in guaranteed funds have grown strongly from mid-2006 11
Figure 7: Net sales into equity-linked UCITS have been negative in 2007 12