Monthly Archives: October 2012

Problems Currently Facing Fund Managers

Jan Straatman, Global CIO of Lombard Odier, made some interesting comments regarding the “problems” currently faced by fund managers, at the CFA Institute Fifth Annual European Investment Conference held in Prague, 18-19 October 2012

  1. Although there have been a proliferation of new asset classes in the last two decades, the globalisation of the capital markets through company expansion and orchestrated multi-national monetary policy has reduced the diversification impact across asset allocation.
  2. The pedestrian returns of the last five years suggest a reset of expected long term asset class returns that paint a grim future. If we are building portfolios based on asset class return history, we will struggle to meet our return objectives and liability commitments.
  3. Equities, the engine of portfolio returns over the last century, seem to be in a prolonged and stagnant range reminiscent of the post Great Depression or Oil Crisis periods.
  4. Fixed Income, the great white knight of the recent past on the back of a secular decline in interest rates, can’t possibly be expected to continue its stellar run.

Largest Coca-Cola Bottler in Europe Coming To Zug For Tax Reasons?

Coca-Cola Hellenic Group, one of the largest bottlers of The Coca-Cola Company’s products in the world, and the biggest in Europe is transferring its HQ from Athens to Zug, Switzerland. Coca-Cola Hellenic operations span 28 countries, serving more than 560 million people. The company was previously headquartered in Athens but had already been active in Switzerland with three bottling plants prior to the move, having started operations in Switzerland in 1936.

Coca-Cola Hellenic

Coca-Cola Hellenic Markets

The move is only partly due to tax reasons according to news reports. Greeces austerity measures are certainly not helping but the reports give other reasons than tax:

a. Refinancing is getting more difficult for companies domiciled in Greece as capital controls imposed if Greece needs to leave the EU/Euro would endanger business. A large dairy producer also left Greece recently for Luxembourg due to this reason.

b. Investors are asking for a premium on loans, bonds for any Greece domiciled company.

c. Missing stability of the country. Riots, demonstrations, strikes, elections, tax system changes all are destabilising events.

On October 14th the speaker of EU tax commissioner Algirdas Semeta told the swiss sunday paper “Sonntag”: “We no longer accept harmful tax regimes”. And the swiss tax system was harmful: “It only serves to attract companies from other countries and take away tax substrate”. At the EU summit on December 13th  in Brussels they expect Switzerland to suggest solutions to the problem.

The EU tax commissionars office is obviously taking a very populist and non-analytical approach to the reasons behind companies leaving Greece and is also looking the other direction with regard to the EU member Luxembourg who is also a winner of the situation.

One noteworthy comment from a reader of Tages-Anzeiger:

“One way to look at it is that thanks to Switzerland the jobs stay in Greece, the company pays the same amount of taxes as it did before there […]. In return the company can access capital more cheaply and preserve jobs [in Greece].”


Effect If Foreign Holding Companies Lose Their Advantageous Tax Status

According to the Canton of Geneva based on a CREA-Study (french), the effect, the decision to discontinue the advantageous tax status foreign holding companies enjoy, would be substantial and very negative for Genevas’ finances.

Most of the holding companies that would be affected are active in the finance and trade sector. They employ close to 20k employees which is 8.1% of all jobs in Geneva.

Yesterday I wrote: “Some small questions marks remain as to whether socialists forces could endanger the love of wealthy people with Switzerland. Currently it doesn’t seem as though populist demands actually are that popular.” Well it seems that pressure from the populist or socialist parties in neighbouring countries and the EU in general could start to make life unpleasent for the many large employers who currently account for substantial tax income if they succeed in making Switzerland give up the special tax status foreign holding companies enjoy here.

If and when the job market turns sour because the affected companies find greener tax pastures elsewhere, the property market will likely also be affected, which in turn will affect lending policies and start putting the breaks on for the local economy.

Is the Property Market in Switzerland Forming a Top?

Top forming?

Real Estate in Switzerland is looking decidedly fully priced in absolute terms. People are paying these lofty prices with the same arguments I heard from people I was working with on the trading desk in London, shortly before the major correction across the UK struck and images of the demise of Northern Trust went around the world. 1. The population is growing 2. Space is getting rarer 3. Long term house prices rise 4. Inflation protection of a real asset.

It should be noted that London held up well. If one believes that Switzerland is a Hong Kong or a Singapore, then long-term appreciation should continue. After all; things like a highly productive work force and efficient tax-spending thanks to the advantages of a large population on a small piece of land create an economic sweet spot. Some small questions marks remain as to whether socialists forces could endanger the love of wealthy people with Switzerland. Currently it doesn’t seem as though populist demands actually are that popular.

History suggests to be alert to the appearance of such tendencies domestically and from neighbouring countries, when mainstream media make tax refugees heading to Switzerland headline news while at the same time having a large percentage of unemployed. That will always be a black swan or a volcano like event, hitting many unprepared.


Will Dividend Payout Hold Up Going Forward

Payout ratios in the US are at multi-decade lows, leaving room for increases while at the same time demonstrating relatively small downside potential, the above chart would suggest. This of course also applies to the equities we watch in Europe and Switzerland in particular.

In the words of BlackRock:

The key is to focus on companies with strong balance sheets, exposure to fast-growing emerging markets and a track record of dividend growth. Also consider international and “new” dividend plays such as cash-rich technology stocks.