Matthew Feargrieve investment management and investing news blogsite

As parts of Switzerland introduce soft lockdown measures in a battle against an autumnal wave of coronavirus significantly worse than the first, C Permit holder MATTHEW FEARGRIEVE considers the role of federalism in Switzerland’s culture and politics, and how it is hobbling the country’s response to the Second Wave.

In March this year, just as the pandemic was making its first impact in Switzerland, we reported in this blog how export chief Stefan Brupbacher typified the fabled Swiss work ethic and likely response to the virus, as he called on the Swiss government simply to distribute face masks so the population could carry on working (“Es braucht dringend die Abgabe von Masken”).

Brupbacher’s remark was notable for several reasons. Both its sentiment and its being made in the German language evidenced a deep-seated cultural divide that has always existed in Switzerland, between the country’s German-speaking lands (cultural stereotype: hard-working and economically successful) and the French-speaking (easy-going, and poorer).

Back in March it would have been hard, right at the start of a ride into the unknown, when Europe was just starting to introduce lockdowns, to imagine an official in the francophone regions of Switzerland sticking his neck out and similarly asserting: Everyone Keep Working.

So Brupbacher came to personify, at that moment in time, the typical response of the German-speaking cantons to the virus: sensible precautions to be taken, but the economy to be kept going. And, throughout the Spring and Summer, it looked as if Switzerland, like Sweden, had got it right.

Fast forward to November. The Second Wave is moving through Europe. And in Switzerland, the epidemiological situation is, astonishingly, dividing itself along the same old geographical and cultural lines: Swiss-German on the one hand, and Suisse Romande on the other.

Healthcare Crisis

Geneva recently established itself as Europe’s biggest COVID hotspot, in terms of newly reported coronavirus infections. As hospitals in Suisse Romande (broadly speaking, the francophone cantons) have steadily filled with COVID patients throughout October and November (more than a thousand in Geneva alone), and as pressure mounts on intensive care facilities, health officials have stated that COVID cases are four times higher in this region than in the German-speaking cantons.

Hospitals in Geneva, Vaud and Valais (the principal francophone cantons) are already postponing routine medical procedures, such as heart and cancer treatments, to free beds for the growing influx of virus patients.    

True, these differences can be explained in demographical and geographical term. Geneva, for example, has a relatively high population density, and suffers because of its proximity to the French border, across which there has been relatively unrestricted passage of people and goods throughout the year. Municipal elections in Valais and the Bénichon Festival in Fribourg are also thought to have contributed to the increase in infections in these regions.

But the fact of life in Switzerland right now is that the good people of the German-speaking cantons are enjoying meals in restaurants and drinks in bars, whereas their compatriots in Suisse Romande are effectively locked down, with eateries, bars, shopping and entertainment venues, and other “non-essential” businesses, all closed.

A Divided Country

Swiss natives and foreign expats alike are familiar with the term röstigraben, a culinary allusion to the cultural differences between French-speaking and German-speaking Switzerland. And so, as the impact of the virus divides itself along the same lines, a newly coined term -  coronagraben -  is gaining rapid currency as a pointed and deeply symbolic means of referring to those regions of the country that are suffering the most.

Switzerland’s federalism is a key component of this cultural and epidemiological division. It is this federalism that enables a French-speaking official in Suisse Romande to force businesses to close, whilst her German-speaking counterpart, in the canton five minutes down the road, sits in a restaurant and eats cheese fondue.

The cantons enjoy autonomous, decentralized powers in social and economic matters. The handling of the pandemic is no exception.

One painful corollary of this cantonal autonomy is the assumption of full responsibility for the economic consequences of any lockdown or other restrictive measures that a canton’s officials decide to impose. And this economic pressure places the poorer, francophone regions in a uniquely impossible position. Just at the moment when they need to keep their local economies going, the risk of pressure on hospital beds (quality of healthcare being, in truth, as uneven across Switzerland as it is in other countries) forces local governments to impose a shutdown. Whereas in the richer German-speaking cantons, a combination of fuller coffers, better-equipped hospitals and more hospital beds, enables life to go on largely as normal.

This state of division is a consequence of Swiss federalism. The stark-  and growing- difference in quality of life between the röstigraben and the coronagraben is placing this model under mounting pressure.

Swiss Federalism in Crisis

Traditionally, fiscal federalism has fuelled fierce tax competition between the cantons. After all, brotherly love was never the prime motivation when the cantons chose to federate. But there is now a growing recognition in Switzerland that central government needs to step in, and implement a consistent and coordinated crisis response, applicable across all cantons and administrative regions.

But such a centralized initiative would run contrary to a venerated credo in Swiss life...

Business is Business

This was the driver behind Stefan Brupbacher’s prophetic utterance in March, and why the Swiss government has – astonishingly – been pleading poverty as a countervailing argument against the imposition of lockdowns. So we had Finance Minister Ueli Maurer asserting that the country simply cannot afford a second lockdown: “We don’t have the money for it”.

The numbers suggest otherwise. Switzerland’s debt-to-GDP ratio stood at just 41% in 2019, but the government reckons that the drop-off in economic activity in 2020 will force the issuance of sovereign debt to the tune of CHF22 billion (equating to 3% of GDP). By comparison, fiscally frugal Germany is planning to print debt worth 6.4% of its GDP, to finance its fight against the virus.

There has been remarkably little pushback against this fiscal rhetoric from the mainstream media and political circles in Switzerland. No political party or senior politician (committee men, all of them) has publicly called for the introduction of a centrally-led lockdown. It took a petition in early November by fifty Swiss economists to focus some pressure on the lockdown issue. The petition reasons that, whilst a lockdown causes economic loss, the bigger picture is that  “the economic costs of a pandemic staying out of control are borne later, as the economy stalls, and spreads to other sectors”. The economists opined that what Switzerland needs is “a swift second lockdown”.

The petition is dated 2 November. The terms of the cry to action voiced by these economists are unequivocal. The government’s response? More federalism. Cantonal authorities to impose “soft” lockdowns, on their own terms.

The Federalist Flaw

Now, to be fair, the government of Switzerland faces the same pandemic challenge as most other administrations worldwide: do we lockdown, or do we stay open and keep going?

The answer is clearly not as easy as Mr. Brupbacher thinks it is. The differentiator in Switzerland’s case though, and the real problem here, is that its government cannot see the challenge for the federal trees. Individual cantons cannot and should not be expected unilaterally to select and implement an holistic COVID strategy. The cantons need to act cohesively as one body, and to implement a uniform approach to lockdown, coordinated by central government.

As the economists’ petition points out, the stakes could not be higher:

There seems to be a pervasive misunderstanding regarding the economics of COVID-19: an argument is often made as to the economic costs of a lockdown, invoking a tradeoff between the economy and health. In our opinion, and especially in the kind of situation Switzerland is in now epidemiologically, this is a false dichotomy: there is no such trade-off. The choice is between 1) a big recession, overwhelmed hospitals, and many excess deaths under current policies; and 2) a big recession with fewer deaths and a manageable health system under a second lockdown.

Matthew Feargrieve is a C-Permit holder and investment management consultant. You can read Matthew’s Switzerland blog here, and his business blog here. You can see his Twitter feed here.  

As Joe Biden prepares to take the presidential reins from Donald Trump, investment expert MATTHEW FEARGRIEVE considers the implications of a Biden presidency for your investment portfolio and what action investors should be taking.

Leaving aside the fall-off of the S&P500 as Donald Trump’s current refusal to concede the election plays out (something that investors will need to keep a close eye on), it is axiomatic that when the US sneezes, the rest of the world catches a cold. And, whilst investors naturally keep an eye on the US as an economic bellwether, we should keep in mind that the US went into recession in February 2020 and has not officially re-emerged.   

The 2020 Election: What Didn’t Happen

First, what didn’t happen. The so-called Blue Sweep that some pundits had predicted, as Trump’s popularity appeared to wane in polls on the run-up to the election, did not materialise. Trump did significantly better than the markets had expected. History tells us that a Democrat in the White House enjoying a majority in both houses of Congress usually results in an initial market sell-off, averaging a 2.4% drop in the S&P 500 in November following a sweep, with a recovery in December averaging 3%.  

Over the past quarter century, when Democrats controlled the executive and legislative, the S&P500 rose an average of 9.8%, rallying three times in four after the election.

A Democratic sweep traditionally sees the renewable energy and industrials sectors benefitting from a new focus on infrastructure in Washington, while pharma (and, now, Big Tech) tend to dip on increased government regulation.

On the other hand, a Republican President presiding over a split Congress results in an average S&P500 gain of 5.3%, with stocks rallying following two in every three elections. And had Trump won, with Republicans holding the Senate and Democrats retaining control of the House, historical data tells us that the S&P500 would have enjoyed a short term rally of around 4% based on the election not having caused any earthquakes.

Far from the Blue Sweep, the Democrats managed to hold on to their majority in the House of Representatives but failed to wrest the four seats they needed to gain control of the Senate. There is a possibility that Democrats could win runoff races in Georgia leading to a deadlocked chamber, the more likely outcome is that the US will operate under a divided government.

And guess what? That’s not all bad news for your investment portfolio.  

What Will (Likely) Happen; and Why Capitalism is a Coward

At the time of writing, it looks likely that Biden win be declared winner by the Electoral College, but Republicans will retain control of the Senate.

Being blocked by the Senate, President Biden would be significantly hampered in his ability to legislate new policies, most obviously a regulatory crackdown on Big Tech. This scenario therefore sees a continuation of Donald Trump’s lenient corporate tax policy, the counterpart of which would be Biden’s more stable trade and international policy.

There is a broad consensus that the markets would favour such a state of gridlock (or status quo?), with historical data suggesting that the S&P500 rising by an average of 13.6% and rallying after the election. The VIX Index (or “Fear” index), which measures expected volatility in the US stock market, tailed off in the immediate aftermath of the election, having touched its highest levels since June in the run-up.

In short, the market rally that began when Biden started pulling ahead should be seen in the light, rather than as significant of any major policy departure that Biden may be able to pull off. Clearly, capitalism is a coward, and investors shouldn’t let themselves get carried away by any post-election buoyancy in the markets. What we should expect, probably, is more of the same. And as we said at the top of this blog, the US is still in recession.

What Can Biden Do?

One thing we can feel reasonably safe betting on is that President Biden will be tougher on COVID-19 than Donald Trump was. The market rally on news of the Pfizer vaccine has cooled somewhat, as the realities of its global implementation sink in, and the ability of the US to keep the virus in check will remain a key concern for the markets.

Nonetheless, cyclical stocks are leading the vaccine rally, and they would benefit greatly from a Biden-driven central bank response to reflating the US economy. Such a Federal policy-led stimulus, together with the likely downward trajectory of the greenback, suggests that US equities will fare a lot better than US bonds in 2021, although it has to be said that the prospect of a stimulus bill has been greeted by the markets, post-Election, as a broadly positive prospect for bonds as well as equities.

So what does Biden mean for my Portfolio?

Well, for a start, maybe a pivot towards US stocks and away from US debt instruments for 2021.  For this reason, we think that the traditional weighting of equities-to-bonds in the US section of your portfolio should be revised in favour of equities. If you don’t want to implement this yourself, a multi-asset investment fund can provide a convenient balance of equities and bonds with less risk than a fund investing only in equities. You can read more about this in our blog here.

After almost a year of coronavirus, growth stocks show no signs of losing pace over value stocks, the latter needing a sizeable economic fillip upwards for their re-emergence.

We think that, because of the policy inhibitors the Republicans will place on Biden, investors do not need to be overly wary of Tech stocks, but they should nonetheless keep in mind the combination of Big Tech’s high market power and low tax yield, which may prompt more regulatory action against stocks like Amazon, Google, Apple and Facebook.

One obvious corollary of a Biden presidency would be a broadening of your portfolio’s exposure to Healthcare, particularly given the Democrats’ promised reprisal of Obamacare. Speaking of Obama, his administration tried but made little inroads into the ability of Pharma to fix its own prices for its own drugs. Investors should not forget that the US population is an ageing one.  

Bank stocks are cheap right now, and we think the markets are overly bearish about them, for the reasons just mentioned. We think that there will likely be an across-the-board resurgence in prices following Year End reports, and certainly by the time of Biden’s inauguration in January 2021.

Infrastructure should do well under a Biden administration, being a sector historically favoured by the Democrats.  Biden has pledged to spend US$1.7 trillion in order to turn the US by 2050 into a fully clean-energy economy, with net-zero emissions.

Companies with a play in “low carbon” should also be kept under surveillance by investors during Biden’s first term. Regulations are increasingly more likely across economies outside the US to reduce the energy demands powering infrastructure. This will similarly create opportunities for companies in this space.      

In conclusion

We have explained in this blog how President Biden will face some real inhibitors from the Republican-held Senate on his ability to implement serious policy change. As we have seen, the markets are already responding favourably to this state of semi-deadlock (some would call it a continuation of the status quo in the US).

In our view, investors would do well to similarly react in a measured way, both to the Trump-Biden transitional process and thereafter to Biden’s first term. His presidency at the moment poses measurable and relatively low-impact risks that will, because of Republican blockers, take time to evolve, giving investors opportunity to adjust their portfolio accordingly.

Investors will likely find themselves implementing this strategy in a time of buoyant US equities, which are set for a healthy 2021 if the incoming POTUS is able to get to grips with COVID-19 in the US and manages to reflate the US economy with a programme of centralized fiscal stimulus.

Matthew Feargrieve is an investment consultant. You can read more about him here.

        

Disclaimer: the views expressed in this blog are the author’s personal views only, and nothing in this article is intended to be financial advice.