Burkhard Varnholt, Chief Investment Officer, Bank Sarasin & Co
The member states of the European Monetary Union are engaged in a cat-and-mouse game as they struggle to find the right answers, accountabilities and policy options. In the current edition of “Perspectives”, Burkhard P. Varnholt, Chief Investment Officer of Bank Sarasin & Co. Ltd, explains why “Switzerlandisation” of Europe presents a feasible way out of the no-future society. He also provides interesting food for thought by outlining some unlikely but nonetheless possible developments that could surprise investors in 2013. The bottom-line implication for investors is that the world’s ever-decreasing social, ecological and economic fault tolerance can only be overcome by means of a systematic, active, sustainability-oriented asset management mandate.
“No future” was the formative slogan of the British punk movement. Interest rates and protest music admittedly have little in common at first glance, but they do have some fascinating parallels. During the punk movement of the late 1970s, the young generation wanted to pry money away from the old generation. Today the situation is reversed. Today an elder generation in Europe, the USA and Japan has come to the realisation that its standard of living and social entitlements can only be maintained through irresponsible monetary and fiscal policies that scrupulously ignore future costs. In this sense, the zero-real-interest-rate level that currently prevails in Europe, the USA and Japan represents the metaphorical tip of the iceberg. A society that doesn’t reward saving also undermines the incentive to invest. In other words, a society that saves and invests less shifts its attention from the future to the present. Most of the members of today’s no-future movement wear white collars, and they are mortgaging the economic future of the young generation to pay for their present standard of living.
Burkhard P. Varnholt, Chief Investment Officer, Bank Sarasin & Co. Ltd: “Many Western countries collateralise the bulk of their new sovereign debt by pledging the taxable income of future generations. This ‘no-cost’ raising of additional liquid funds via unlimited sovereign borrowing makes the original members of the no-future punk movement – who wanted to grab money from the old generation – seem like harmless schoolboys in comparison.”
Europe must “Switzerlandise” itself
The repercussions of this no-future attitude are also visible in the debt and confidence crisis currently facing European countries. Some would prefer to leave the euro zone altogether, while others want ostracize the overleveraged countries, and still others want a “communitisation” of sovereign debt coupled with a centralisation of fiscal-policy authority and – if necessary – further backstop interventions by the European Central Bank. It is seldom noted that a simple and flexible mechanism for effectively limiting debt expansion has successfully been utilised in Switzerland for decades. That mechanism is the rigorous application of the subsidiarity principle. This principle – the strict segregation of public spending, revenues and debt at each of the different levels of government – could serve as a valuable blueprint for the European Economic and Monetary Union.
What could surprise us in 2013
Thinking up potential developments that seem improbable but nevertheless possible is an integral part of formulating investment strategies. In this context, Burkhard P. Varnholt this year has again conjured up some potential surprises for 2013.
1. Economy: The euro zone enacts debt-brake mechanisms and labor-market reforms
Discrete but effective pressure exerted by the European Central Bank, the International Monetary Fund and European policymakers induce Spain, Italy and Portugal to implement important labor-market reforms. Furthermore, the euro-zone heads of state for the first time agree to a politically binding schedule for enacting debt-brake mechanisms.
2. World politics: China's new leadership fosters a social market economy
China’s handover of power to its new president represents an affirmed commitment to systematically developing a social market economy. This lends a tailwind not just to China’s economy, but also to its notoriously undervalued stock markets.
3. Science and technology: Sustainable energy technologies spark a revolution
A raft of independent technological breakthroughs in generating power from ocean waves, wind and the sun lead to a sustainably enlarged and diversified electricity supply. A number of advances also enable electricity transmission capacity to increase several-fold.
4. Financial markets: The year 2013 becomes one of the best ever for stocks
With above-average stock performances ranging from +10% to +40% depending on the market, 2013 turns out to be one of the best years for stocks in history. The positive performance is driven by stubbornly low market interest rates, a persistent dearth of investment alternatives and astoundingly robust corporate earnings growth.
You can read additional surprising scenarios in the full “Perspectives” newsletter, which can be downloaded for free from our website at www.sarasin.ch.
Long-term implications for investors
Our world’s political, social, ecological and economic fault tolerance is rapidly decreasing. That’s the simple and crucial reason for the concept of sustainability. But the concept of sustainability cannot succeed unless it is truly understood at and from the three cardinal tiers and perspectives: politics, economy, and everyday life and investors. Faced with this backdrop coupled with rapid cyclical swings, high volatility and a bewildering flood of information, most investors are overwhelmed, at least psycho-emotionally. All investors – regardless of whether private or institutional – are strongly urged to make a systematic, active, sustainability-oriented asset management mandate their top priority.