Bank Sarasin & Cie AG : Perspectives from the Sarasin Group: Dangerous game with property and responsibility

The reckless monetary and fiscal policies of the West are undermining private property and responsibility for individuals. Yet both need each other and bring obligations with them in many respects. Burkhard P. Varnholt, Chief Investment Officer of Bank Sarasin & Co. Ltd, explains in the current edition of "Perspectives" that creeping expropriation by the state, however, is having another impact. Ironically, it is leading to a bull market of many years' standing in equities and other risk assets. Though not without reversals, it could make the SMI climb to 15,000 points by the end of the decade.

"The right to property is hereby guaranteed", states Article 26 of the Swiss Federal Constitution. This guarantee of the right to property is directed primarily to the lawmakers themselves. For a society without private property - history has made this unmistakably plain - is doomed to fail: first it fails economically, then it fails socially, and finally it fails politically. And when a society fails politically, then freedom too is endangered. That is why protection of property rights and of individual responsibility is one of the most important actions which a country can take in order to be successful.

The guarantee of the right to property becomes lip service

It is all the more chastening to discover that the guarantee of the right to property is being consistently undermined by the fiscal repression and monetary expansion of the West. But it is a dangerous game when governments, claiming to protect a fragile economic and financial situation, degrade the guarantee of the right to property into mere lip service. The most important reason why at present so many governments are pursuing a property-hostile policy with impunity lies precisely in the fact that this very policy is currently pursued by almost all Western democracies. This gives the impression of there being no alternative. But with its duplicity the West is putting a higher asset at hazard: its internal and external credibility.

On property and responsibility

At bottom, property and responsibility essentially need each other. That property brings obligations, is a general experience in life. But property brings obligations in another, very direct, valuable sense. The ability to transform social savings into capital investment via credit services is the prerequisite for a society with a division of labour. And division of labour is a prerequisite if a society is to promote the comparative advantages of specialised technology, training and industries for its social benefit.

Property also brings us obligations towards the natural and social foundations of our economic activity. In short: to augment our property, we take more out of nature than we put back. It is the responsibility of the property owner to invest and use his assets with due consideration for the natural world. And finally property brings with it an obligation to exploit that world sustainably. That is why companies with a large proportion of family shareholders often enjoy above-average success.

Long-term implications for investors

Since the start of May 2009 most equity markets have risen by 30% to 100% in value. So can we still invest in equities? Yes. For, ironically, a boom of some years' standing in equities and other risk assets is the most important consequence of the Western world's dangerous experiment in monetary and fiscal policies. And we may assume that it will last for at least another five years, because the political costs of its suspension grow disproportionately every year. For this reason the second, central consequence of the foregoing thoughts is that an equity boom over a number of years could very well last to the end of this decade, to 2020. Even price earning ratios of 20x are quite conceivable - since a number of years with zero or negative real returns on government bonds would certainly justify it. When in 1982 the Dow Jones index stood at 1,000 points, nobody would have believed that it was entering on a 17 year boom, which would bring it in 1999 to 12,000 points. If by the end of this decade the Dow Jones can climb to 25,000, then the SMI can certainly rise to 15,000 points. Against this backdrop, Burkhard P. Varnholt, Chief Investment Officer of Bank Sarasin & Co. Ltd, recommends long-term investors to invest in the equities of sustainably managed companies.