Head of Saxo Strats
Summary: As the EU needs more funding for various policy goals, including climate change mitigation, health care and education, and the population realises how little in tax billionaires are actually paying, the EU Commission implements a law that annually taxes 2% of wealth. The law sends shockwaves through Europe’s luxury industry, with the luxury behemoth LVMH plunging 40%.
It is a great irony that the EU, which is the world’s biggest welfare system, has created 499 USD billionaires who are paying the lowest amount of personal tax in percentage of wealth compared to billionaires from North America and East Asia, according to the Global Tax Evasion Report 2024. Billionaires in France have a pre-tax income rate on par with US billionaires despite the fact that the entire population is paying between 46-50% in average tax, violating the core principle of reciprocity. In the Netherlands, it is even better to be a billionaire, as the average tax rate is below what US billionaires pay.
As social unrest in Europe is constantly at the edge of eruption, and as costs associated with the green transformation, the war in Ukraine and general inflation rise, the EU Commission commits to the July 2023 European Citizens’ Initiative (ECI) entitled ‘Taxing great wealth to finance the ecological and social transition’. The EU Commission implement a law that annually taxes 2% of wealth on billionaires in the EU, acknowledging the reality stated in Thomas Piketty’s book ‘Capital in the Twenty-First Century’ that wealth is growing faster than income. The 2% wealth tax on EU billionaires raises EUR 42 billion in additional tax revenue, which goes into funding of climate change mitigating projects, health care, education and public infrastructure. In 2021, the total financial assets of households in the EU in equity and investment funds were around EUR 10 trillion, so a wider 2% wealth tax on multi-millionaires could lift tax revenue to around EUR 100-150 billion.
The EU’s modern version of Robin Hood sends shockwaves through the European luxury industry. Recent studies have shown a strong correlation between the pursuit of luxury items and levels of income and wealth inequality. The EU Commission’s new wealth tax immediately lowers market expectations for luxury goods demand in the future and investors dump European luxury stocks.
Market impact: LVMH shares plunge 40% on the EU Commission's new wealth tax and other parts of the luxury segment including Porsche and Ferrari see their share price suffering badly.
2024: The wasted year
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.