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Monday, 11 December 2017

Switzerland's appeal returns in a world of short-term bets

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Anthony Peters, SwissInvest Strategist

Whether equity markets are up or down a percent or two on any given day now seems to be neither here nor there and the fact that Asian markets decided to rally on Monday morning need not be taken as an indicator of what Europe will do on the follow.

Rumour and conjecture as to who is going to rescue whom and how continues to dominate the headlines but the core fact that the crisis persists won’t be altered. The equation is simple: leverage once funded debt; the leverage is gone, the debt is not – yet. It doesn’t matter how many fandangos you dance, it won’t go away. So, strictly speaking, we are not suffering a debt crisis but a financing crisis. Not only is the funding gone, but the authorities have made darned sure that it won’t come back.

Anyhow, I have just returned from a few days in Switzerland where there is little prima facie evidence of the storm which is enveloping the surrounding countries. However, we did talk a lot about what may or may not happen to Switzerland if the eurozone were to implode. Swiss private banking has had a pretty bad time of late – forget the general banking mess at UBS and to a lesser extent at Credit Suisse – with the generally fairly successful American assault on Swiss banking secrecy.

The equalisation of personal taxation around Europe had also rendered Switzerland as a tax haven less attractive, albeit not entirely undesirable. However, as the eurozone crisis deepens and it becomes ever more obvious that domestic tax regimes in the likes of Italy or Spain will need to become more stringent, then the desire to ship funds offshore and out of the eurozone will become more pressing. Spot the destination?

Although Switzerland as a “Finanzplatz” is no longer as opaque as once it was, it still looks like an attractive place to park one’s money, even if it is mostly or at least partially legitimate. The declaration by the Big Two that they would like to reduce their exposure from the cut and thrust of global investment banking might prove to be ideally timed.

The cold wind of redundancies in banking hasn’t hit Switzerland too hard yet but I get a feeling that it might once again escape the worst. Sure, individuals who act in the wholesale markets aren’t looking too clever but I suspect a budding boom in private wealth management. Greek speakers wanted! On the side, I also visited Lugano where I found there to be considerably more cars with Italian licence plates clogging the town than usual; I wonder why …

Belgium’s move to a proper government

This weekend’s downgrade of Belgium is yet another fine mess with nobody being quite sure who has and who hasn’t implemented a change in the credit standing of that little country. It has long been a dinner party joke in the UK to name a famous Belgian other than Hercules Poirot and TinTin, both of whom are of course fictional. Eddie Merckx is real but to call Herman van Rumpy-pumpy famous would maybe be something of an exaggeration.

Incidentally, he also sits on the board of Dexia; what qualifies him to be a non-exec of a bank escapes me entirely. I would have thought that career politicians should have been the first to step down from their so-called “roles” at badly busted banks but then again, why should I have been so stupid as to have though that? Belgium’s debt/GDP levels have always been high and in effect never really much better than Italy’s.

Its politics make Italy look like a paragon of virtue and stability. Nevertheless, after a year and a half of living with an interim government under Caretaker Prime Monster Yves Leterme, I understand that during the weekend the feuding parties have agreed on the formation of a proper government. So it must have been Standard & Poor’s which banged their heads together and forced them to get on with something. I have yet to hear the Jean-Claude Juncker, Muppet in Chief, come out and thank the ratings agency for contributing to the progress in creating much-needed political stability in one of the member states and thus helping it tackle its fiscal fruit salad.

Incidentally, while in Zurich, I watched 10-year Gilt yields briefly but very noticeably fall below those of 10-year Bunds. What they might be doing there is anybody’s guess and one CIO who I was having lunch with opined that he reckoned Gilts to be the most obvious and evident medium term-short bet in the world. I did try to find a counter argument but manifestly failed on the basis that I can only see short bets; what I, along with most of the world’s investors can’t seem to find is the right and proper long to put in its place.

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