UBS's Orcel Sees Volatility Risk to `Complacent' Markets

(Bloomberg) -- The volatility driving trading income at securities firms will last through the third quarter due to geopolitical events, even as investors remain complacent, according to Andrea Orcel, UBS Group AG's investment-banking chief.

“We have strong underlying economic growth and that will continue: emerging markets are quite resilient, Europe and the U.K. are a little less good,” he said in an interview with Bloomberg Television. “You can talk about Brexit and other things like that. That will continue to move the markets -- we think the markets are quite complacent and leveraged,” Orcel said.

The spike in volatility helped U.S. investment banks as well as UBS boost their trading income in the second quarter and will continue to do so, he said. The third quarter is usually less liquid than the beginning of the year. Rising volatility has led investors to put on more hedges, which helps banks' trading income.

A “wall of cash” absorbed and dispelled the force of a market correction earlier in the year, Orcel said. He also said said that investors that use leverage to generate higher returns have outperformed those who didn't, and that this higher leverage, combined with economic growth, helped asset prices to soar.

Trade Surprise

“People have not been able to make money from being negative,” Orcel said. “That's what concerns us.” Rising trade tensions are not fully priced into asset prices, which could lead to “bad surprises," he said.

The trading performance at UBS in the second quarter outshone rival Credit Suisse Group AG, whose trading arm still hasn't fully rebounded from a deep restructuring. Six years ago, UBS pared back fixed-income trading and is now focused on so-called flow activities such as foreign-exchange trading, equities and advisory services. Credit Suisse is trying to replicate a similar model, with a stronger emphasis on boosting revenue-generating synergies between the trading unit and its wealth-management franchise.

Orcel has been showing in recent quarters that UBS's balance-sheet constrained model has been working, beating expectations for the investment bank and even outshining the bank's flagship wealth management business.

“In the businesses we are focusing on, we are growing, have high market share and are profitable, and I don't think anybody is eating our lunch," he said.

To contact the reporter on this story: Jan-Henrik Förster in Zurich at jforster20@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Keith Campbell

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