Top 3 Société Générale Private Wealth Management Interview Questions

Over the last decade there has been a trend of major investment banks aggressively expanding out their wealth management divisions (with mixed success) due primarily to the stable, fee-based nature of wealth management revenue (in addition to the fact that a wealth management division isn’t balance sheet intensive, a boon as banks now navigate a Basel III Endgame world).

However, Société Générale (SocGen) has butted this trend. In fact, in recent months SocGen has sold off its UK and Swiss wealth management units in order to raise capital (this has been part of a broader strategy by SocGen over the last few years of selling off non-core businesses in niche areas or geographies).

However, even though SocGen’s wealth management business has shrunk in geographic terms, SocGen’s CEO, Slawomir Krupa, has made it clear that SocGen will continue to expand out its traditional wealth management business in SocGen’s core markets of France, Luxembourg, and Monaco.

While it’s always a bit surprising to see an investment bank purposefully shrink its wealth management division, this approach by Krupa seems sensible. Because one of the consequences of nearly every major investment bank doubling down on wealth management has been that large markets now have fierce competition (i.e. in the UK there are now firms like Goldman Sachs and JP Morgan competing not only with the likes of Barclays, but also with well-established niche wealth managers like Coutts). Therefore, it probably makes sense for SocGen not to spread its resources too thin in a vain attempt to capture more market share in markets it has a much smaller footprint in – especially when you have a significant footprint and a natural advantage in your core markets.

There’s a natural tendency among those looking to break into wealth management – especially among those still in college – to focus on the overall size and scale of a wealth manager globally. While that’s not a terrible approach – since size and scale often correlates with significant training and support for new entrants – it’s always best to look at a firm’s footprint within the geography that you’ll actually be in – and if you’re looking to be in France, Luxembourg, or Monaco then SocGen is still a preeminent name that has significant market share (even if SocGen’s global footprint and overall AUM is now reduced relative to what it was a few quarters ago).

SocGen Private Wealth Management Interview Questions

SocGen’s private wealth management interviews will follow a similar script to wealth management interviews at other investment banks: it’ll be a structured, formal interview that puts a significant emphasis on your ability to communicate what’s happening in markets in a clear, but somewhat in-depth, way (i.e. as if you were talking to a well-informed client about market developments).

1. What’s driven the returns of a classic 60/40 portfolio over the last year? Do you think there’s a reasonable chance, over the next twelve months, that a 60/40 portfolio will have either negative returns or returns that are over 20%?
2. What’s the biggest downside risk to a 60/40 portfolio right now?
3. How have rate cuts cycles of the past impacted equity markets?

What’s driven the returns of a classic 60/40 portfolio over the last year? Do you think there’s a reasonable chance, over the next twelve months, that a 60/40 portfolio will have either negative returns or returns that are over 20%?

Over the last year we’ve seen remarkable performance out of a classic 60/40 portfolio (60% equities, 40% bonds) regardless of if we’re looking at a US-centric asset mix (i.e., 60% S&P500, 40% treasuries) or one that incorporates in equities and fixed-rate instruments from other developed markets.

This is because the market has coalesced around the idea that inflation is approaching "target" in most developed economies (around 2%, although different central banks have slightly different targets) and this has led to rate cut cycles finally beginning, yields falling across the curve as a result, and equities rebounding due to both the decline in yields and a belief that no recession will occur in the near term (in the last few weeks we had the Fed embark on its rate cut cycle with a 50bps move and the ECB last week reduced rates by 25bps). In other words, most are now believers, especially in the US, that a soft-landing will occur.

However, the performance of a classic 60/40 portfolio over the last year has been in large measure informed by the anticipation of what’s to come (rate cuts), not what has actually come (since few rate cuts, as a percent of the total rate cuts anticipated, have actually occurred right now).

Therefore, if those anticipated rate cuts were to be priced out then equities would likely fall and yields (of course) would rise. Thus, we’d have both sides of the 60/40 portfolio perform poorly just as we’ve had both sides perform extraordinarily well over the last year (remember yield and price, for fixed-rate instruments, have an inverse relationship).

Without a doubt that biggest risk on the horizon is that inflation will reverse its downward trend, cause central banks to slow or pause the rate cut cycle they’ve just begun to embark on, and we’ll have a reversal of most of the additional rate cuts that have been priced into markets right now.

This can seem like a remote possibility – or at least one the market isn’t pricing in much of a chance of right now – because, as of this writing, the S&P has rallied for six straight weeks (the longest period since this time last year) even as yields in the US have repriced a bit higher due to higher than expected CPI, better than expected jobs numbers, and GDP growth that continues to surprise to the upside. Notice how yields have inched up relative to a month ago, but are still down across the curve from three months ago (and significantly from this time last year)...

And it’s for this reason that Goldman’s model of 60/40 portfolios (imperfect, as all models area) forecasts a pretty remote possibility that a classic 60/40 portfolio will either heavily underperform (have negative returns) or overperform (have 20% or higher returns) over the upcoming year.

In Goldman’s view, we’ve received almost all the benefits of the anticipated rate cuts over the last year – as yields across the curve have adjusted down, and equities have leapt up over 40% since October 2023 based on the rapid fall in yields and stronger than expected economic performance – and right now the most likely outcome is that equities will trade modestly up and that yields will continue to come down a touch as markets become even more confident in inflation coming down to target and staying there.

But because so much has already been priced in, we aren’t likely to see large gains in the future (and because Goldman assigns a very low probability to a recession occurring or inflation reigniting, there’s a small probability of realizing the negative returns that’d likely occur in either of those scenarios).

What’s the biggest downside risk to a 60/40 portfolio right now?

This is just an alternative way of asking what the biggest downside risk to either equities or fixed income is right now – because the answer is all the same: another flare up in inflation that takes rate cuts off the table since, as discussed above, what has led to the significant gains across equities and fixed income over the last year has primarily been the anticipation of significant rate cuts across developed markets.

Right now, the consensus is still that there will be significant rate cuts by the Fed, BoE, BoC, RBA, and ECB through the remainder of 2024 and into 2025. However, over the last week in the US there have been signs that perhaps there won’t be quite as many rate cuts as the market anticipated only a month ago (in fact, the level of overall rate cuts by mid-2025 has been curtailed by around 50bps over the last week).

The reason for this slight revision in rate cut expectations boils down to core CPI coming in above expectations, initial jobless claims coming down after a brief tick up due to labor disruptions caused by several hurricanes, the belief that China might begin to bolster growth more through fiscal stimulus as opposed to continuing to be a modest drag on global growth, and inflation expectations in the US coming in quite strong (to this latter point, the Fed is a believer that consumer expectations of higher inflation tends to be a self-fulfilling prophecy, so is always concerned when inflation expectations rise significantly above 2%).

Further, as Goldman recently noted, one of the reasons why headline inflation (which includes energy and food inflation) has looked so favorable over the last few months is because oil, despite all the geopolitical conflicts that have occurred and are ongoing, has remained anchored at a pretty low level (well below where we were at the start of the Ukraine conflict, for example).

However, should there be a significant and persistent rise in oil prices – due to the Ukraine conflict ratcheting up yet further, continuing deterioration in the Middle East situation, or some other unforeseen event – that could feed through not only to higher headline inflation but also add to the already quite sticky core inflation we’ve observed over the last few months (since prices for goods and services tend, over the long term, to incorporate in higher energy costs via higher prices).

This is, to be sure, an inflation tail risk and no one is putting too much money on oil prices spiking anytime soon. But against our current backdrop of surprisingly sticky inflation data, if we see a significant rise in oil that could lead to a significant and sharp reversal of the market’s expectations for future rate cuts (even though most central banks, and the Fed in particular, are loath to admit that they’re influenced by inflation that arises from higher oil prices since they view increases in oil prices as largely transient in nature – as they largely have been over the last few decades).

Note: It should also be added that in the US the outcome of the election is anticipated to have significant impacts on asset class under- or overperformance, as illustrated by SocGen in a recent report below:

How have rate cuts cycles of the past impacted equity markets?

This can seem like a question that has a pretty obvious answer: when rates decline that lowers the discount rate and, all else equal, that should be a net positive for equities (of course, over the last year we’ve seen this play out with the rapid fall in yields corresponding to a rapid rise in equities). However, this ignores the fact that there can be very different reasons why a rate cut cycle is undertaken.

Right now, all central banks that have begun their rate cut cycles (i.e. the Fed, BoE, ECB, and BoC) have done so because inflation has moved toward target and thus they want to move toward the neutral rate (the theoretical interest rate at which inflation will stay around target while full employment is maintained). In other words, they want to move rates to a slightly more neutral level to preempt any weakness that could arise from keeping rates too high for too long.

But often a rate cut cycle is entered into not to preempt weakness but as a reaction to weakness that has been observed – whether that be the labor market beginning to soften more than expected and unemployment ticking up, GDP growth surprising to the downside, etc. In these cases, often the rate cut cycle begins too late and a recession is unavoidable since rate cuts take months to feed through and once negative sentiment begins to pervade the economy it’s hard to reverse it.

Because of this, we tend to see a bifurcation in equity market performance after a rate cut cycle is entered into: if there’s no recession in the twelve months after the first cut, then equities perform exceptionally well. But, on the other hand, if a recession does occur at some time over the next twelve months, returns tend to be negative (since the benefit of a lower discount rate is more than offset by lower earnings growth or earnings declines). Right now, the market believes there won’t be a recession over the next twelve months and equities seem on track for significant gains – but, of course, no one can perfectly predict when recessions arise.

Here’s an overview of the last seven rate cut cycles and the relative performance of global equities (depending on if there’s a US recession or not)…

Note: Even though we’ve had a raft of strong economic indicators in the US over the last few weeks, the reason why the Fed kicked off their rate cut cycle with a 50bps cut (as opposed to a 25bps cut) was due to the fact that there were significant revisions to employment data in August that appeared to show a labor market that was significantly weaker than previously thought. This spooked both markets and the Fed, so in order to not be “behind the curve” the Fed opted to do the first “jumbo” rate cut since 2007. In retrospect, this was probably unneeded, based on the strong labor market data we’ve received more recently, but most don’t view the Fed as having made a policy mistake (at least right now) because rates are still quite high relative to what the neutral rate is thought to be (around 3-3.5%).

Conclusion

The decision by SocGen to sell their wealth management units in the UK and Switzerland took the market a bit by surprise – if for no other reason than wealth management units offer stable revenue for investment banks, and thus most are loath to even contemplate getting rid of their wealth management businesses no matter how much they may have underperformed expectations.

However, one shouldn’t extrapolate from SocGen’s recent moves that they’ve deprioritized wealth management overall. Quite the opposite: they’ve decided that it’s better to retain and expand their footprint within their core geographies they operate in than to be yet another player in geographies where SocGen, overall, has a much smaller presence.

As mentioned earlier, the types of questions you should expect from SocGen will be your typical mix of private wealth management interview questions (i.e. behavioral questions, market questions, and technical questions). With that said, there is the added challenge of needing to be able to speak to both what’s happening in the US and the EU – so, be sure to have a view on the ECB’s rate cut cycle, economic growth across major EU economies, and EU equity sectors that you’d be overweight or underweight right now.