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The major market indexes ended the month of November at much the same level as they had started it. For those who take just a passing interest and only occasionally look at the progress of stock-markets it might well have appeared to have been a benign month. Nothing could have been further from the truth.

In fact, those who monitor markets closely on a daily basis will have seen a much different picture. In the second week of the month we witnessed a recurrence of the brutal and dismal market conditions of August and September.

The proximate cause of this return to bedlam was the issuance of US employment numbers and associated data on 6th November. These figures showed a far, far more positive position than had been generally expected with unemployment falling to just 5% and coupled with improved levels of income.

Whilst all this was clearly good news, it raised market expectations of the long-heralded US interest rate rise now actually being implemented at the Federal Reserve meeting in December. In reality that should not be a problem but market-makers still seem to feel obliged to perform an initial knee-jerk negative reaction when interest rates rise.

As ever, the Federal Reserve will make its statement at the end of their next quarterly meeting on 17th December; just in time for the possibility of a traditional ‘Santa rally’. It is worth noting that in 25 of the last 31 years the equity markets have rallied in December and so it would not be a complete surprise if this were the case again. However, lingering doubts related to US interest rates and potential further terrorist activities may act as a dampener this year.

In fact, towards the end of November market attention became centered on the appalling terrorist outrages in Paris. In the past, equity markets have rapidly headed southwards in response to such reprehensible acts and market participants were braced for a major sell-off on the Monday following that previous Friday evening’s events.

From the forensic investigation that followed the 9/11 attack on the World Trade Centre in New York we became clearly aware that the terrorists had shorted the US stock-market in advance of their violent strike. The very substantial profits they thus made have since been used to finance further atrocities.

One of the few pieces of positive news to emerge from their latest acts of barbarism in Paris was that global markets did not sell-off sharply but responded in a calm and measured way and maintained their composure. As a result, an equity market rally this time caused the terrorist short-sellers to sustain substantial financial losses (which is both morally satisfying and about as much as capital markets are able to inflict in terms of retribution).


On 30th November the FTSE 100 closed at 6356 (which denotes a fall of -3.20% for 2015 to date). It also represents a fall of 0.08% during the month of November.

By comparison the Quotidian Fund at the end of November stood at +17.99% for the year to date, having been marked down in value by +0.76% in the month. We currently stand 21.19% ahead of our benchmark (being the FTSE100 index).

Markets all now await the Federal Reserve’s rate decision on 17th December. Currently there is a 70% chance of an increase in US rates at that meeting (which would be the first increase since 2006) but that upward move is only expected to be at the very modest level of 0.25%.   Signals from Janet Yellen (the Fed’s chairman) suggest that this will be followed by similarly minor increases over the next twelve to eighteen months entirely in harmony with economic progress in the USA. Present indications are that there is a ceiling of 2% in mind as the maximum target rate. We do not expect that to create a long term problem.

It is salutary to note that the major market indexes (and particularly those in the USA and the UK) now stand at roughly the same level as they did in November 2014. In light of that, Quotidian’s comparative performance illustrates the added value of active professional investment management as opposed to simply opting for market tracker funds or the ‘structured products’ on offer from the usual suspects. We have frequently described tracker funds as too often providing ‘return free risk’ and that assertion is clearly evidenced by this latest example.

As ever, though, we recognise that unmonitored stock-markets can rather sharply make one look very silly indeed and so will keep the sound of trumpets muted and focus on trying to maintain our positive progress through these uncertain times.

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The long anticipated decision to increase interest rates in the USA for the first time since 2006 was finally confirmed by the Federal Reserve in their December mid-month meeting. As expected, the increase was at a rate of just 0.25%.

In her summary following the rate announcement Janet Yellen emphasized that negative economic forces were being offset by solid expansion of domestic spending and added that foreign economic risks “appear to have lessened since the summer.” She described the dollar’s rise as “transitory” and made a point of stating that any future interest rate rises would be of a similar minimal size and would only be implemented in harmony with US economic growth.

Despite her dovish commentary the immediate aftermath of every Fed meeting is always volatile in equity markets with whiplash moves in both directions. The real underlying trend typically asserts itself once the short-term turmoil ebbs away.

Indeed, equity markets, in typical fashion, immediately reacted violently; in the following two hours stocks initially sank, then they soared, then they sank again, and eventually the Dow surged 224 points upwards by closing bell. The dollar remained roughly flat.

2015 will go down as another year of above average volatility. Following steady and generally upward momentum in the first half of the year equity markets did then have their periods of bedlam from August onwards.   In August itself we saw the 2015 version of a “flash crash” when the Volatility Index (VIX) spiked from below 11 to above 50 in just three weeks.

Take your pick as to the culprit/s for the dramatic August sell-off that saw the Dow shed 2,400 points in just those three weeks (and I’m probably omitting a few worries from this list):

  • China’s seeming economic slowdown – although China’s GDP growth still shows a clean pair of heels to much of the rest of the world
  • European debt and immigration concerns – indeed the very existence of the EU in it present form remains questionable
  • Deep falls in Commodity prices in general and the price of oil in particular
  • Corporate profits under pressure
  • Fears that the Federal Reserve would increase interest rates in the USA, and, perversely
  • Fears that the Federal Reserve would not increase interest rates in the USA!

August and September saw a convergence of most of the items on the ‘worry list’ and although stock market volatility subsided briefly in October it returned with a vengeance in November and December.

In December, which is traditionally a bullish month for stocks and shares, extreme volatility kicked off once again.

First, the People’s Bank of China (PBOC) followed up on its big “one-off” yuan devaluation in August with yet another effective devaluation of similar magnitude. For as long as the dollar remains strong the PBOC may feel the need to adjust the yuan lower in response (thus potentially injecting more turbulence into equity markets as was the case in August).

In addition, the European Central Bank (ECB), the Bank of Japan (BOJ), the Bank of England (BOE) and many other global central banks are walking a similar tightrope too; trying to “devalue” their own currencies by using various forms of monetary stimulus. The trick is to do so without going as far as to trigger a crisis of confidence with resultant capital flight out of their own economies. It’s a risky business.

On 31st December the FTSE 100 closed at 6242 (which represents a fall of -4.93% for the 2015 year). It also confirms a decline of 1.79% during the month of December.

By comparison the Quotidian Fund at the end of December stood at +16.56% for the year, having been marked down in value by -1.22% in December itself. At year end we stand 21.49% ahead of our benchmark (it being the FTSE100 index). It is worth noting that this December mark down occurred on the very last two trading days of the year (when trading volumes were thin to non-existent). This is a perfect example of artificial pricing but, of course, we are obliged to “mark to market”. No doubt the real trend will emerge as 2016 gets into its stride.

You will have seen in our November monthly report that we anticipated the short-term market reaction to the very likely event of a December rise in US interest rates. Given that this increase had been widely signaled by the Federal Reserve for the past nine months or so it was hardly Einsteinian insight on our part.

We highlighted “market expectations of the long-heralded US interest rate rise now actually being implemented at the Federal Reserve meeting in December.  In reality that should not be a problem but market-makers still seem to feel obliged to perform an initial knee-jerk negative reaction when interest rates rise”.

We went on to say that “We do not expect that to create a long term problem”.

Indeed, the actuality closely followed that script.  On the day of the interest rate announcement markets gyrated frantically before closing on the high side.  The following two days were profoundly negative but the panic subsided again just another two trading days later.  

Volatility is established as a feature of stock markets nowadays and likely to remain a permanent element.  That being so, our role encompasses managing that volatility as best we can.  We are pragmatic and do our utmost to extract emotion from the decision-making process. Stock selection is the key to consistently above average performance; aiming to be in the right stocks in the right sectors of the right markets at any given point in time is our guiding strategy. That philosophy served our investors well in 2015 (and indeed for years gone by).

Fundamentally, if we believe that market negativity is a true reflection of real economic problems then we would seek to liquidate or reduce our exposure.  In many cases, though, equities are simply being subjected to synthetic price reductions (by market makers seeking, inter alia, to test the resolve of certain types of investor).  If we deem this to be the case then we seek to take advantage of short-term opportunities and top up reliable holdings at ‘bargain’ prices.

Many of the worries on the list above will no doubt continue to dog equity markets in 2016. Despite that, however, we remain sanguine to the achievement of positive performance in 2016 via meticulously selected stocks in carefully chosen sectors of the equity markets of very specific countries. We continue to have confidence in the individual stocks and assets that currently comprise the Fund’s purposefully focused and concentrated portfolio.

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The first two weeks of February saw an even further worsening of the decline in equity valuations that has bedevilled global stock-markets since the first trading day of the New Year. Fear-motivated panic, stoked by those who have a vested interest in creating volatility, reached a crescendo by the end of the second week of this month at which point the FTSE100 index sank to a reading of 5499.

As the usual Cassandras who issue them know full well, the trouble with doom-laden statements is that they have a nasty habit of becoming self-fulfilling. It is food for thought that in the spring of last year Footsie had risen to its apogee of just over 7200; February’s low-point represented a fall of 25% on the main UK market index from its all-time peak last April.

Despite the continuing negativity and volatility in financial markets profitable business is still alive and well in many parts of the world. There is no rhyme or reason behind the extreme gyrations that still prevail across the board in equity valuations.

  • I particularly want to expand on the views expressed in my January report as to the market’s direction and the reasons behind it……..and to reassert that I do believe these bear market conditions are, to a large degree, synthetic and will have reversed by the end of May.
  • For the time being, though, you will have seen that the madness still persists and the reason I describe this markdown as artificial is drawn, inter alia, from the market’s reaction to the fourth quarter results now being issued in the US and the UK (our two main areas of investment).  Of our individual company holdings, thus far in this results season 11 of them have now reported.
  • Of those, 3 (Manhattan, Gilead and Biogen) have produced brilliant figures, well ahead of market expectations.  Another 6 (Electronic Arts, BioMarin, Celgene, Apple, Alexion and Starbucks) have produced figures that equal or beat expectations by a little way…….and only 2 (Amazon and Regeneron) have produced disappointing numbers.
  • Despite that, all of these shares have been savaged in the current market negativity.  The point is that demonstrably these are real companies making tremendous real profits in the real world……yet the market is determined to mark everything down on the back (apparently) of falling oil prices!  
  • As I say, it is transient and actually presents a great investment opportunity for investors to increase their exposure to carefully selected equities at a very low ebb in global markets.  It may continue to get worse before it gets better but I still see May as being the most likely time of a return to more positive conditions.
  • The Healthcare (Pharmaceuticals & Biotech) sector has been particularly badly marked down although actual corporate performance has continued to be robust.  At some point in the relatively near future that reality will return to valuations.

The economic situation in the USA is a template for the global economy.

In February, Janet Yellen (Chairman of the Federal Reserve) appeared before the US congress to testify on the state of the US economy, its monetary policy and associated financial issues germane to the equity markets. To summarise her major points:

  • The US employment market continues to strengthen. Labour market data shows persistent jobs and wages growth and growing confidence. In her testimony on 10th February Yellen cited the 2.7 million increase in payrolls last year and the 13 million in cumulative jobs added since 2010. She also emphasised that unemployment was now running at a rate of only 4.9% and that there were “noticeable declines” in underemployed and ‘discouraged’ workers.
  • Economic growth is good but not yet great — Yellen noted “moderate expansion” in GDP, emphasising household spending in general and housing and auto sector growth in particular. But she also acknowledged that “subdued foreign growth and the appreciation of the dollar” were holding things back and she noted weak activity in the energy sector.
  • The Fed chairman highlighted declining stock prices, rising borrowing costs and a rising US dollar saying that they “could weigh on the outlook for economic activity.” She also made reference to the risks associated with China’s economic slowdown and weaknesses in commodity-linked economies.
  • At the same time, though, she blunted those concerns by saying that “ongoing employment gains and faster wage growth” should help the US economy. She also said that “highly accommodative monetary policies abroad” would be likely to boost global economic growth. In other words she basically said the Federal Reserve would not be by forced by plunging equity markets into a change of course to cutting US interest rates nor launching another round of Quantitative Easing.

After the truly dreadful second week of February, equity markets have since reacted positively to Yellen’s testimony.

Elsewhere in the world:

  1. China’s economy is struggling through a transition from being an export-led manufacturing-intensive economy to being more reliant on domestic consumption.

By some measures China is already succeeding on the economic front, in spite of its fractured stock market.

True, China’s industrial sector is going from bad to worse with the Manufacturing PMI contracting steadily. But at the same time, China’s service sector (including financial services, retail, travel and leisure, health care and education) is thriving; more than making up for the slowdown in factory output.

The reality of that is supported in these figures:

  • China’s retail sales hit a record high of $4.2 trillion in 2015, and sales are expected to top $6.5 trillion within the next 5 years; a 50% growth rate.
  • Domestic passenger rail traffic is up 10% over the past year, and Internet traffic more than doubled last year alone.
  • Last year, and for the first time, China’s middle class (at 109 million consumers) exceeded America’s middle class (at 92 million).   

And that is the reason why the service sector of China’s economy is growing so rapidly; a thriving and upwardly mobile middle class. An annual GDP growth rate of 6% plus is far from shabby. The USA and Europe can only wish that they should have such growth “problems”.

At the moment that is not reflected by their stock market. However, China’s stock-market tends to be a trailing indicator of the economic situation whereas in the West we are more used to stock-markets being leading indicators of economic development.  Time alone will bring the Chinese market into line with what we clearly identify above as positive trends for their economy.

  1. Cyclical problems will fade; structural ones will not. The elephant in the room in respect of equity valuations remains that of huge and ever-increasing sovereign debt in so many countries around the world. Strangely, national politicians and world leaders seem somewhat reluctant to draw attention to their own profligacy and apparent inability (or unwillingness) to reign back government spending and reduce sovereign indebtedness.
  1. The attraction of German equities and why:

Germany’s debts are equivalent to just 71% of their GDP which is much more manageable than that of most countries. In comparison, the UK’s indebtedness now stands at 87% of GDP and the average for the Eurozone is 93%. There are many examples of countries where debt is well over 100% of GDP.

Household debt in Germany stands at 83% of GDP whereas in the UK the equivalent figure is 125%. Thus the German consumer has more discretionary income to spend and, in so doing, will boost the local economy.

Germany has a particularly low birth rate and a shrinking population. This might explain their enthusiasm to take in a substantial number of refugees from the Middle East and Africa. In the long term that will most likely be of great benefit to their economy.

The Eurozone’s monetary policy has to cater for the less well managed economies of southern Europe (Greece, Italy, Spain, Portugal and others) and as a result is currently too loose and likely to remain so. This will benefit the value of assets in Germany (shares and property).

  1. The USA’s Nasdaq market has been hammered in the first two months of 2016.

After being the best performing global market for the past three years it has been virtually unwatchable this year and currently stands down -17.50% from its December 2015 high.

We don’t think that that blood-letting has been a fair reflection of economic reality. After years of relatively smooth upward momentum the Nasdaq was due for a typical correction but the speed and depth of its recent downturn defies common-sense.

However, we note and are reassured by the fact that when this kind of severe pullback has occurred in the past there has usually been a pause for breath over the following few weeks before the long-term uptrend has resumed. We anticipate the same response to this recent short-term downward pressure.

On 29th February the FTSE 100 closed at 6097 (a fall of -2.33% for the 2016 year thus far); little changed from the end of January although having suffered significant falls mid-month.  

By comparison the Quotidian Fund’s valuation at the end of February is down by – 21.32% for the year to date; only a slight decline since January in spite of the mid-month market collapse.

Falling oil prices and a supposed slowdown in China are simply diversions intended to take attention away from the fundamental truth of sovereign financial mismanagement.

Supporting evidence for this assertion comes in the performance of the Chinese stock-market and its supposed effect on global markets. We were asked to believe that the decline of 7% in China’s equity market on the first trading day of this year was the proximate cause of the huge and sustained falls in global equity markets that then followed. It is interesting to note that on 25th February the Chinese stock-market again fell by 7%; however, the reaction this time was that equity markets around the world rose by 2% or more! So much for the New Year fairy story.

Politicians worldwide have proved adept at kicking the sovereign debt problem into the long grass or introducing measures to postpone the necessary action and simply knocking it further down the road. However, as I asserted in January’s report, until governments find the political will to control their spending and begin the process of reducing their national debts then we will continue to experience short term periods of volatility in financial markets. Far be it from me to sound cynical but one sometimes wonders if many our global political leaders actually do know their ACAS from their NALGO.

Our relatively recent experience of Gordon Brown’s inept mismanagement of the UK’s Treasury provides vivid proof that the socialist ideology of spending one’s way out of debt has been entirely discredited. The UK is still dealing with the financial consequences of his many failings.

Sadly, Europe is still dominated by similar left-wing ‘thinking’ and the less said about the USA under Obama’s insipid and financially incontinent stewardship the better.

Quotidian’s portfolio is focused on quality assets and we remain entirely confident with our current holdings; we also remain resolute and have not been panicked into selling any assets as this downturn has persisted. Thus we have not crystalised a paper markdown into an actual loss.  

Historically, big stock-market falls have been the trigger for a big rebound. When the current bedlam subsides we are confident that our asset holdings will return to realistic valuations.

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The main market-moving issue of any real note in March related to the European Central Bank President Mario Draghi who, together with his fellow EU policymakers, convened in Frankfurt on 9th March with a view to creating yet another “whatever it takes” plan in an effort to bolster the Eurozone’s financial strength.

Blissfully ignoring the fact that none of their previous programs had met their intended objectives (in particular, for three years now annual inflation in the Eurozone still lags the ECB’s 2% target rate) Draghi seemed determined to give markets everything they wanted at this latest policy meeting. The result was that they:

  • Cut the ECB’s refinancing rate to 0% from 0.05%
  • Cut the EU’s deposit rate to 4% from 0.3%
  • Expanded the EU’s Quantitative Easing program (QE) to 80 billion euros per month from 60 billion…a figure that trips easily off the tongue but takes on a more shockingly profound focus when you write it down and consider the number of zeros involved
  • Added euro-denominated investment-grade corporate bonds to the list of ‘assets’ the ECB can buy with its QE freshly printed money
  • Extended the projected end date of QE to at least March 2017 from September 2016…with the implication that it will be further extended beyond that in due course
  • Launched four new “Targeted Longer Term Refinancing Operations” (targeted loan programs designed to encourage banks to lend to the real economy).

It does seem rather quaint that the ECB feels the need to incentivise banks to actually perform the very function they are in business to do. Somewhere along the line banks seem to have forgotten that the fundamental cornerstone of their business is lending; it appears that they much prefer to pursue a range of non-banking related avenues as a means of increasing their revenue and profits (although they don’t seem to be much good at those either unless they’ve rigged the relevant markets).

In short, Draghi tried to do everything he could to signal that monetary policy still has potency but he now runs the risk of exposure to the law of diminishing returns. As has been clearly evidenced from rounds of QE in other parts of the world, despite those massive infusions of easy newly-printed money policymakers around the globe are still missing their own inflation targets.

That’s not just my view, by the way: it is also the assessment that the International Monetary Fund and the Organization for Economic Co-operation and Development have both concluded.

None of the ECB’s actions actually solve the fundamental flaws in the single currency of the Eurozone. They treat some of the symptoms for the short-term but do not cure the disease.

In the USA, the Federal Reserve held their latest meeting on 16th March and as entirely expected they decided to leave US interest rates unchanged.

Specifically, the post-meeting statement said that “household spending has been increasing at a moderate rate,” that the “housing sector has improved further” and that there has been “additional strengthening of the labour market.” It also said that prices might be low now, but they should rise “as the transitory effects of declines in energy and import prices dissipate and the labour market strengthens further.”

Consequently, the Federal Reserve lowered their projection on the number of rate increases they are planning to implement this year. The expectation now is for just two very modest rises compared with four previously.

Despite that clear message the markets reacted badly and in knee-jerk fashion to just one US analyst’s contradictory report implying that he expected an additional rate increase to be applied in April. That caused another bout of wild short-term swings in the US markets which then infected global markets.

As the resulting uncertainty continued to reverberate around stock-markets worldwide, Janet Yellen felt obliged to firmly re-state the Federal Reserve’s position. Her very dovish comments have finally led the markets to conclude that near-term rate increases will not happen and they have restored a sense of calm. It would seem that the blindingly obvious has to be repeated a multiplicity of times in order to penetrate the grey matter of some financial journalists and market-makers.

In fact, the Fed funds futures are not even factoring in an interest rate rise until December of this year indicating that the Fed’s June meeting will be yet another non-event.

On 31st March the FTSE 100 closed at 6174 (a fall of -1.09% for the 2016 year to date).  

By comparison the Quotidian Fund’s valuation at the end of March is down by –15.43% for the year to date; that reflects a positive return for March of +7.47%. As indicated in our most recent reports, we are entirely confident in the constituent parts of our current portfolio and anticipate positive progress to continue further.

The remaining headwind to our upward momentum this year has been the muted performance from our holdings in the Pharmaceutical and Biotech sector. Historically this sector has been highly successful for us for many years but has been subjected to unjustified negativity since the start of this year.

However, the tide is now turning in our favour again which underpins the confidence I mention above. A detailed summary of our liking for this particular sector was contained in my October 2015 monthly report.  

On the horizon, of course, the EU referendum is looming in Britain and that is likely to provoke short-term uncertainty the UK markets.

The quality of the debate between the ‘remain’ and ‘leave’ factions has thus far been depressingly low to non-existent. The status quo side seems to be content with scare tactics underpinned by questionable figures (much of which have been stage-managed or belatedly seen to be based on fallacy) whilst the ‘enough is enough’ campaign is fractured and seemingly incapable of creating a coherent strategy.

No serious mention has yet been made of Europe’s disastrous and continuing migrant crisis and its economic, social and safety implications. Neither has there been any focus on the inherent problems of the common European currency and its adverse economic effects, particularly on unemployment.

One of the few facts that we can rely on from official and dependable sources is that the latest UK trade figures show a record deficit with the EU. They confirm a trade deficit of £8.10 billion in January alone and of £23 billion in the last three months. That would appear to indicate that the UK is a far more important trading partner to the EU than the EU is to the UK. So much for the ‘vital importance’ of the free trade link with the EU that has been trumpeted by the pro-EU faction.

In light of just those trade numbers (let alone the ongoing migrant issues and the Euro with its ‘one size fits all’ philosophy) one questions why the UK could or should feel the need to remain in an excessively bureaucratic, anti-democratic, demonstrably corrupt and economically bankrupt alliance.

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Equity markets around the world were focused on two main issues in April; the flow of quarterly corporate results and the potential of further central bank financial accommodation by way of quantitative easing.

First quarter results began to filter through from 10th April onwards and the initial signs were positive. As the results season gathered pace the number of positive earnings and profit ‘surprises’ injected a little more confidence into equity valuations. Indeed, by the third week of the month the FTSE came into positive territory for the first time this year as it rose above its 31st December 2015 closing level. Similarly, major markets around the world rallied to 2016 year highs. However, this uplift was not to last.

The Bank of Japan had been expected to announce a further round of financial ‘stimulus’ having pledged earlier this year to do anything and everything to eliminate that nation’s economic ills. Japan’s economy is on the cusp of slipping back into recession for the fifth time since the Great Recession of 2008/9 and, in terms of deflation, Japanese prices dropped by another 0.30% in March (their largest decline in three years).

Indeed, earlier this year the BoJ had continued its Quantitative Easing programme by printing hundreds of trillions of yen to buy up everything from government bonds to stock market ETFs to Real Estate Investment Trusts. In addition, having kept interest rates at near zero for many years it cut them into negative territory in January.

In the event, overnight on 27/28th April the BoJ presented global markets with a very unwelcome shock. It didn’t boost the size of its 80 trillion yen-per-year QE program as had been fully expected, it didn’t lower its negative -0.1% benchmark rate any further and it didn’t buy even more equity ETFs in order to maintain stock-market support (in other words, it didn’t continue to artificially manipulate the Japanese market higher).

As a result, the Japanese benchmark equity index (the Nikkei Stock Average) initially dropped by 3.6% and continued to fall, putting substantial downward pressure on worldwide markets throughout 28th and 29th April. The demonstrable failure of QE and the policy of negative interest rates in Japan has called into question the efficacy of similar stimulus programmes elsewhere (particularly in Europe)

Typically and tediously global markets reacted in knee-jerk negative fashion to the BoJ’s lack of action and we were treated to yet another bout of wild short-term swings in the US and European markets. These were exacerbated by the fact that, with the long holiday weekend upon us, market makers preferred to mark prices substantially down and pause for thought until trading desks resume after the May Day holiday.  

At 30th April, of the 325 companies from the S&P 500 that had thus far reported their results, 249 had produced positive figures in excess of market expectations. Indications on the flow of future earnings were largely upbeat too and so the likelihood is that this should help to lift equity valuations again when markets re-open.

On 30th April the FTSE 100 closed at 6241.89 a fall of -0.01% for the 2016 year to date.  

By comparison the Quotidian Fund’s valuation at the end of April is –14.72% for the year to date (which reflects a positive investment return for April of +0.84% (a figure which had been much higher before the temporary markdown in the last two days of the month).

On the horizon, of course, the EU referendum is looming in Britain and that is likely to provoke further short-term uncertainty and volatility in the UK stock-market. With that in mind we took the opportunity whilst FTSE was in positive territory for the year to close our holdings in that at a profit (albeit a small profit). We will be seeking to re-establish holdings in the UK market when an appropriate prospect for profit arises.

The debate between the ‘remain’ and ‘leave’ factions continues to be turgid with neither side seemingly prepared to focus on the real issues. As the outcome of the referendum will become the main focus for markets over the next seven weeks we feel it appropriate to consider and comment herein on the relevant issues and facts.

In our view the main issues of importance to the UK and its voters are:

  • The impact on UK trade and commerce of the decision either to leave the EU or to remain.
  • The financial and social impact on the UK of unrestricted immigration both now and in the longer term
  • The effect of an exit vote on Britain’s defence and security.

Taking each of these in turn:

I highlighted in last month’s report the significant trade imbalance between the UK and our EU trading partners (which is hugely unfavourable for the UK). We are told that the EU market represents approximately 44% of the UK’s trade. What has not been made clear is that this figure has actually been declining for many years; where once the EU was responsible for around 55% of the UK’s trade that position has slowly been eroded.

It obviously follows that approximately 56% of the UK’s trade is with markets outside the EU bloc.

Sadly, the leaders of the ‘remain’ faction have been more intent on trying to produce scare stories rather than any worthwhile information or debate. The quite ridiculous and perfidious pamphlet produced last week by George Osborne epitomises their blatantly one-eyed approach. Their tactics gave every impression of having started with their desired conclusion and then working backwards making use of manipulated assumptions and deliberately distorted figures (whilst also ignoring any positive data) in order to arrive at their required answer.

On the opposite side of the debate, last week a group of serious and highly respected economists produced a much more credible report which concluded that the UK (if free of the EU’s trade barriers) would benefit from a 4% increase in GDP.

Another report produced and signed by 110 competent and respected figures in the financial world stated that London would actually strengthen its lead as the world’s biggest financial hub if the UK did exit from the EU. It asserted that increasing regulation from Brussels posed a significant threat to Britain’s financial services industry and that the UK would be better off outside the EU. We are under no illusion that the EU would prefer to see Frankfurt replace London as its financial centre.

No mention whatsoever has yet been made of the trading opportunities inherent in the British Commonwealth countries. This group of 53 sovereign countries (who are members of the Commonwealth by choice not by diktat) comprises a population of 2,357,512,000 people and growing whereas the EU bloc has a current population of 508,191,116. Even before we consider the opportunities for trade presented by the USA, China and other emerging markets we have an enormous untapped trading resource within the Commonwealth.

Despite Mr Obama’s interference with the referendum process at the beginning of the month, there is not in fact a formal trading agreement between the USA and the EU. Such an agreement is in the course of negotiation but trade between these two blocs has been happily conducted for many years under the aegis of the World Trade Organisation (which exists to support free trade globally). Obama’s comments were simply politically motivated, lazy and self-interested.

No serious mention has yet been made of Europe’s disastrous and continuing migrant crisis and its economic, social and safety implications. Neither has there been any focus on the inherent problems of the common European currency and its adverse economic effects, particularly on unemployment.

In its blatant attempt to construct a spurious financial case to support the ‘remain’ campaign the Treasury’s disingenuous pamphlet revealed the Government’s prediction of the number of immigrants expected to arrive in the UK by 2030. According to Osborne’s own forecast contained in that brochure this figure was stated to be 3.3 million people (much higher than we have previously been led to believe). To put it another way, that represents an increase of 5% to the UK’s current population (even before taking into account the additional natural increase in numbers with births outnumbering deaths) over the next 14 years.

We can clearly see that the UK’s national facilities are already under severe pressure and stretched to breaking point. One shudders to think of the impact that such a quantum leap in population will have on the NHS, our education system, the UK’s transport structure, defence, law and order, housing facilities and food production. Perhaps it is not a surprise that the government prefers to deflect attention away from the eye-watering levels of increased taxation that would be required to support Britain’s infrastructure in the event of such an influx of people. Common sense and security demand the return of border controls.

Since the end of the Second World War Britain’s defence has been secured through our attachment to NATO. It has certainly not been enhanced through our connection to the EU. Leaving the EU has no bearing upon our continued affiliation to NATO.

On the domestic front, official figures published in April by the Office of National Statistics indicated that violent crime in the UK rose by 27% in 2015. Of the 43 police forces around the country, all recorded a rise and 41 of them showed a double-digit increase. This situation is unlikely to be improved if we see an uncontrolled increase in population.

Despite the scare-mongering and the level of deception masquerading as ‘facts’ emanating from the ‘remain’ campaign, the latest opinion polls suggest that the ‘remain’ side stands at just 43% of the vote, the ‘leave’ group at 40% and the ‘undecideds’ at 17%.

Forty years of experience have shown us that the EU is intrinsically undemocratic, financially incontinent and completely unwilling to change. Leaving the EU would no doubt cause some short-term economic turbulence but the issues set out above make the case for Britain to leave the EU ever more compelling.

Winston Churchill has been deliberately misquoted in the course of this campaign in the hope of supporting the ‘remain’ case. What he actually said was “We are with Europe but not of it. If Britain must choose between Europe and the open sea, she must always choose the open sea”.

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The EU is suffering from the worst income inequality between member nations in recent memory. Whilst this is not a new phenomenon the income gap between richer EU nations like Germany and poorer countries like Spain, Greece, and Portugal has now expanded to an alarming degree.

In 2009, in US$ terms the annual income per capita was:

  • A sizeable $41,890 in Germany, compared to
  • A much lower $32,412 in Spain
  • A meager $29,819 in Greece
  • And a miserly $23,122 in Portugal

Over the past five years, though, the gap has become far, far worse. Income per capita has now:

  • Risen by a robust 13.9% in Germany but
  • Fallen by 4.2% in Portugal
  • Deteriorated by 8.1% in Spain, and
  • Plummeted by 27.6% in Greece

These figures clearly confirm the fact that some of the richer European countries have managed to recover from the Great Recession but many of the poorer member countries have fallen even further into the abyss.

In addition to generating resentment and disdain between social classes around Europe this trend has fomented envy and anger among member nations of the European Union. It is one of the forces that has driven migration from poorer to richer member nations and it sets the stage for the eventual political disintegration of the European Union itself.

As these imbalances become worse the rising tide of anti-EU sentiment sweeping across the Continent is now reaching critical mass. In evidence of that assertion:

In Hungary, the right-wing nationalist conservative Fidesz party enjoys an absolute majority under the leadership of Victor Orban and continues to have record-high popular support in 2016. Today the party’s agenda is viewed as so extreme by those in Brussels that, according to EU foreign policy chief Javier Solana, if Hungary were applying for EU membership today it would be flatly rejected.

In Poland, the fiercely anti-EU Law and Justice Party (PiS) has gained an absolute majority in parliamentary elections in October 2015.

In France, the National Front under Marine Le Pen emerged as one of the strongest political powers, taking more votes in 2015 local elections than the Republicans or Socialists. Again, greater independence from the EU is their primary goal.

In the Netherlands, the Freedom Party under Geert Wilders has vowed to immediately pull the country out of the EU. Although this platform was rejected by voters in 2014, Wilders now leads in the Dutch polls ahead of elections next year thus giving him the ammunition to flatly declare that the “EU is finished”.

In Austria, the Freiheitliche Partei Österreichs (FPÖ) is also staunchly anti-EU. In this year’s first-round election for President the FPÖ’s Norbert Hofer won comfortably with over 36% of the vote.

In Germany, the newly emergent Alternative für Deutschland (AfD) now has more popular support than at any time in its history and now stands just five percentage points behind the centrist Social Democrats. Until recently, although the party was staunchly against the euro, it was ambivalent about the EU. But now their new manifesto is very clear: To abolish the EU forever.

In the UK, the campaign to exit the European Union now enters its climactic phase leading up to the June 23rd vote. Whether the UK decides to stay or leave we will no doubt continue to see an increase in anti-EU opinion all around Europe and, barring a miracle, the days are numbered for the European Union as we know it today.

Does the UK want to remain to the bitter end or, by leaving, does it then want to lead the way forward to a truly democratic European Economic Union where free trade, protected borders and freedom of choice replace the anti-democratic and faintly absurd notion of a Federal Europe ruled by unelected and unaccountable bureaucrats.

Performance and Summary

On 31st May the FTSE 100 closed at 6230.79 (a fall of -0.18% for the year to date).  

By comparison the Quotidian Fund’s valuation at 31st May shows a positive investment return for the month of May of +6.25% and for the year to date is now –9.73%. Despite equity-market headwinds, the Fund continues its sharp recovery from a glum start to the year.

The two most obvious stock-market sensitive issues in June will be the Federal Reserve decision on US interest rates at its mid-month meeting and, of course, the outcome of the UK referendum on EU membership.

It will no doubt come as a surprise to regular readers that (for the reasons set out above and also in my April report) my strong view on the referendum is that it’s time for Britain to say adieu to the EU (adieu is much more permanent that simply saying Eu Revoir!). The European Union as it currently exists is a cesspool of rotten politics, inept leaders and a badly constructed monetary system which is the central cause of so many of the EU’s problems (and that was flawed from its very outset).

We continue to believe that US interest rate will remain unchanged until later in the year and that, whichever way the UK decides to go, any knee-jerk effect on the stock-market here will be transient. Far more pertinently, growth of M1 money supply in the USA has accelerated to 7.8% and that, together with increasing monetary growth worldwide, is usually a harbinger of better economic times.

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The financial services industry is founded on catering for the risks of either dying too soon or living too long.The financial effects of dying too soon can be evaluated and the risk then covered through the use of life assurance.

The issues of living too long are more complex and the real risks are often overlooked by even the most sophisticated investors.

Investors generally have an intuitive grasp of what they perceive as investment risk but in many cases that perception is based simply on the fear of making a definable financial loss.

Rarely does the typical investor take into account the far more serious but much less obvious risks associated with their own life expectancy and the onerous erosive effect of inflation.

With improvements in medical science (particularly over the past twenty five years) a man who has attained the age of 60 nowadays has a life expectancy of 21 years. Contrast that to the situation 25 years ago when the life expectancy of a 60 year old was just 16 years. That is a substantial increase and brings with it a considerable increase in risk.

Developing that theme, a man of 65 now has a life expectancy of 17 years whereas in 1987 it was 13 years and a man of 70 has an expected 14 years ahead of him as opposed to the 10 years he could have expected to live for in 1987.

A similar situation pertains for female lives. A woman of 60 today has a life expectancy of 24 years (up from 20 in the late 1980’s), whilst a 65 year old female would now be expected to survive for another 20 years (up from 17) and a 70 year old has an expectation of 16 more years (increased from 13).

Continuing improvements in research and medical care will further extend the average life expectancy of those living in the developed world.

Quite simply we are living much longer and the finances we have built up will be required to see us through a longer period of time than we may have originally planned for.

Whilst this alone poses a real risk and a grave threat to our personal financial stability and security that risk is magnified much further when we take into account the effect of inflation.

Even a modest level of future inflation has a severely detrimental effect of the real value of our capital and income. We are told that inflation in the UK is currently running at just under 3% per annum.

If it continues at that level then over 5 years it would reduce the real value of our finances by 14%. Over 10 years the effect is more onerous and translates to a reduction in value of 26% and over 15 years the impact is an even more considerable fall of 37%.

Putting that into monetary terms, £100 at today’s values would effectively be worth £85 in 5 years time, £73 in 10 years and just £63 after 15 years of relatively low inflation. Of course, if the rate of inflation rises then these falls in purchasing power become even more significant.

The combined impact of increased life expectancy and future inflation pose a very substantial threat to one’s financial wellbeing and yet these significant risks are all too often overlooked when investment decisions are being made.

An investor opting to take what he believes to be a low risk investment (simply because he is fearful of making an investment loss) is actually leaving himself exposed to the much greater ‘hidden’ risks of extended life expectancy and inflation. As the figures above illustrate, the investor would be in grave danger of unwittingly making his financial position much worse. Sleepwalking towards financial disaster would not be too strong a description of this scenario.

Decision making in relation to investment

It has long been proven that investment in equities has been the most efficient way to maintain pace with inflation over a period of time. The importance of maintaining the integrity of your income and capital cannot be overstated, particularly in light of increased life expectancy and the effect of future inflation.

As has been demonstrated above, inflation erodes the nominal value of your capital and so it is essential to maintain the value of your wealth and the purchasing power that flows from it.

In order to do so it is necessary for your investment manager to try to preserve and grow the real value of your assets through a measured exposure to investment risk. The risks associated with stockmarket investment can be controlled through astute selection and consistent monitoring.

At Quotidian we only make investments where and when we feel that the potential for profit is compelling and we scrutinise our investment decisions on a daily basis.

We seek to invest in assets that have strong liquidity and are readily tradable. We apply a combination of technical analysis and fundamental analysis in arriving at our investment decisions. In so doing, we seek to maximise investment returns whilst controlling exposure to equity risk.

As part of our risk control process we are content to switch into money for extended periods if markets are relentlessly negative and less likely to produce a profit commensurate to risk.

We strongly recommend that investors combat the detrimental risks of longer life expectancy and inflation by including selective and controlled exposure to equities into a well planned investment portfolio.

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Deception masquerading as ‘facts’ was the hallmark of the ‘remain’ campaign.

The quality of the debate between the ‘remain’ and ‘leave’ factions was depressingly low to non-existent. The status quo side seemed to be content with scare tactics underpinned by questionable figures (much of which had been stage-managed or belatedly seen to be based on fallacy) whilst the ‘enough is enough’ campaign was fractured and seemingly incapable of creating a coherent strategy.

No serious mention was been made of Europe’s disastrous and continuing migrant crisis and its economic, social and safety implications. Neither was there any focus on the inherent problems of the common European currency and its adverse economic effects, particularly on unemployment.

In light of just the trade numbers alone (and setting aside the need for democracy, the ongoing migrant issues and the Euro with its ‘one size fits all’ philosophy) one questions why the UK could or should feel the need to remain in an excessively bureaucratic, anti-democratic, demonstrably corrupt and economically bankrupt alliance.

Forty years of experience have shown us that the European Union is intrinsically undemocratic, financially incontinent and deliberately unwilling to change. Leaving the EU would no doubt cause some short-term economic turbulence but the issues set out above make the case for Britain to leave the EU ever more compelling.

The European Union as it currently exists is a cesspool of rotten politics, inept leaders and a badly constructed monetary system which is the central cause of so many of the EU’s problems (and that was flawed from its very outset).

Does the UK want to remain to the bitter end or, by leaving, does it then want to lead the way forward to a truly democratic European Economic Union where free trade, protected borders and freedom of choice will replace the anti-democratic and faintly absurd notion of a Federal Europe ruled by unelected and unaccountable bureaucrats.

Winston Churchill has been purposely misquoted in the course of this campaign in the hope of supporting the ‘remain’ case. What he actually said was “We are with Europe but not of it. If Britain must choose between Europe and the open sea, she must always choose the open sea”.

Methods of leaving the EU – Article 50 and beyond

The first step is to invoke Article 50 of the Treaty of Lisbon. The UK controls the timing of that in entirety. Whilst the EU might wish to rush things (in order to avoid any contagion of Brexit to other countries) it is entirely in the UK’s gift as to when that button should be pressed.

We are already in the EEA (European Economic Area) which is where (once outside the EU) we must choose to remain. This, together with an application to join the European Free Trade Area (EFTA) gives the UK an immediate solution to the ‘access to the single market’ trading problem.

Furthermore, under Article 112 of the EEA Agreement, we also have the unilateral right to claim a partial opt-out from the EU’s ‘freedom of movement’ rules. This would allow us to set up a quota system to control immigration from other EU countries.

However, the EU will no doubt seek to press us into going along with their much-touted plans for a ‘two-tier’ Europe which would leave the Eurozone countries united and centralized and with the UK and other non-euro nations sitting on the sidelines (and possibly joined by ‘neighbouring’ countries such as Turkey and Morocco).

This will be portrayed by the EU as an attractive compromise whereas it is, in fact, a highly deceptive strategy. It would leave the UK still in the EU but as a second-class member with all the disadvantages that we voted to extract ourselves from. We would still be subject to much of the ‘supranational’ system we voted to escape from and it would leave us even worse off than we were.

The most disastrous option is that we could reach the end of our two-year negotiation period without any agreement having been reached. Bear in mind that the EU have already taken 10 years to negotiate a trade deal with the USA and still there is no agreement in sight. Likewise, negotiations with India were abandoned after nine years of pointless wrangling and inability to make a decision by the EU end of things. The impossibility of 28 countries reaching accord is palpably obvious when one looks at the pigs-breakfast they have made of trade negotiations thus far.

Finally, on invoking Article 50, the UK should immediately apply for an extension to the 2 year negotiating period (as the rules allow us to do) in order to avoid the absurd situation where, after leaving the EU but failing to reach an acceptable exit agreement within 2 years, the remaining EU counties could sell to us but we would no longer have the necessary paperwork to sell to them!

We must hope that our negotiators are capable and well-informed enough to negotiate the labyrinth.

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Following the years of global depression from 2007 onwards corporate profit margins have frequently been shored-up by a combination of:

  1. Cost-cutting
  2. A premeditated lack of investment in capital equipment
  3. Record levels of share buybacks by public companies

However, there is a limit to the enduring effectiveness of profit growth using just these measures. Financial engineering of this sort eventually suffers from diminishing returns and so growth in sales is vital in order to boost real long-term earnings growth.

From an investment perspective it thus remains critically important to focus on which sectors and individual stocks are still capable of growing their sales and thereby their profits. It is equally important, of course, to avoid those companies and sectors which cannot or will not do so.

With that in mind, the sectors that we expect to contribute the most and the least to third-quarter results and thereafter are:

The good: Healthcare stocks are expected to report increasing sales up 8% on average from a year ago with earnings per share advancing over 6%. Consumer Goods and Services are also expected to deliver earnings increasing by 5% for the quarter with profit growth of 4%. Technology stocks are the other positive sector.

The bad: Earnings growth for S&P 500 Industrial Sector stocks has been declining for the past two quarters (hand in glove with weaknesses in energy and commodity prices) and profits in this sector are anticipated to decline by over 5% in the third quarter.

The ugly: The worst offenders this quarter will continue to be Energy and Basic Materials stocks. We anticipate that falling oil and gas prices together with continuing declines in many other commodities will bring about dismal results in these sectors both in this quarter and beyond. Energy stocks in the S&P 500 are expected to post a 64% earnings decline on average this quarter while Basic Materials profits are forecast to drop by 18.5%.

The Quotidian Fund places a considerable focus on the Healthcare, Pharmaceutical and Biotechnology sector.

The attraction of this sector from an investment viewpoint is that it has:

  • A long history of relative security and reliable performance;
  • Projections of future profits are consistently robust;
  • Takeovers are commonplace and so there is potential for an occasional huge increase in share prices;
  • Also, on a non-financial but equally important basis, by supporting the development of new medicines we contribute towards a valuable social benefit too.

In the pharmaceutical and biotech sector there are broadly two styles of business model:

  • Companies that spend billions on research & development to produce new drugs
  • Organisations that are simply opportunistic and seek to buy the rights to various drugs which are towards the end of their patent protection period and then ramp up their prices to maximise short-term gains.

We fish in the former pond but not the latter. Companies who create new drugs are able to acquire patent protection on these products which allows them to recoup the costs of development and rightly gain worthwhile profit from their enterprise. Typically, patent protection lasts for 10 years following which any drug can be copied and marketed by all and sundry. It follows that the first ten years from launch of a newly approved drug are the most important and lucrative from the innovating company’s viewpoint.

Opportunistic organisations do have their place as they allow those who are focused on research and development to capitalize the inherent value remaining in those drugs that are approaching the end of their patent protected period and thus direct that value into future R & D.

Companies like Valeant Pharmaceuticals (a Canadian company) are increasingly coming under fire. Their business model focuses on buying well established drugs and then hiking the prices of those drugs massively. They then distributing the resultant profits to management and shareholders rather than investing in Research & Development.

For example, we note that Valeant quadrupled the price of a drug called Cuprimine. The effect was to drive up the cost of just one patient’s treatment to $35,000 a month – a five-fold increase largely covered by Medicare (thus the political hand-wringing and backlash in the USA).

In addition, late last month the industry found another pantomime villain in the form of Martin Shkreli. His company, Turing Pharmaceuticals, bought the rights to a drug called Daraprim which treats an infection called toxoplasmosis. Turing then proceeded to ramp up the price of that drug by more than 5000%.

There are many sides to this issue but soaring drug prices raise widespread ethical, political and social concerns. The current negative publicity has clearly put short-term downside pressure on pharmaceutical stocks in general and biotech stocks in particular.

This is what gave rise to Hillary Clinton’s recent knee-jerk reaction and politically self-interested ‘soundbite’ last month (as covered in my September monthly report). As a consequence of that investors have been concerned that the US government could introduce price controls or other punitive measures on pharmaceutical and biotech companies.

In our opinion this action is highly unlikely because to do so would stifle the development of new drugs and treatments which would, of course, be politically unpopular and morally bankrupt. Innovative companies spend billions on R&D to take a drug concept through the various stages of rigorous testing in order to get FDA approval. Naturally therefore their breakthrough drugs need to be sold at an appropriate and profitable price. Political interference has acted as a drag on the sector at this point in time but we believe that this effect will be short-lived.

On 31st October the FTSE 100 closed at 6361 (which equates to -3.12% for 2015 to date). This represents an uplift of 4.94% during its partial recovery month of October.

By comparison the Quotidian Fund at the end of October was +18.89% for the year to date, having increased in value by +8.88% in the month. We currently stand exactly 22.00% ahead of our benchmark (being the FTSE100 index).

During this exceptional month we have regained virtually all the value that had been marked down during the lacklustre and volatile months of August and September. It is vitally essential not to panic and risk making emotional decisions when markets go through such potentially unnerving periods of negativity.

Our performance in October partly reflects the bounce-back effect of major markets after two months of profoundly negative market correction. To a greater extent though it is a reflection of the positive and considered actions we took at the low points in markets to increase our holdings in those companies we trust whilst their prices had been oversold and, in addition, to building up well-thought-out new holdings up at fire-sale prices.

It has been helpful that the third quarter reporting season (thus far roughly 60% of the companies which form the S&P 500 index have released their latest figures) has produced far more positive surprises than analysts had expected. Future sales and earnings estimates have also been generally encouraging.

Stockmarkets were given further positive momentum in the last ten days of October by the European Central Bank’s announcement that it intends to expand and extend its quantitative easing programme and also by the Peoples Bank of China’s action in reducing interest rates there by a further 0.25% whilst simultaneously easing liquidity requirements for their banks.

An additional air of positivity was engendered when the Federal Reserve issued an upbeat report in respect of the US economy on 28th October and suggested that they might now introduce their long expected interest rate increase in December. As anticipated in our September report, this has been well received by markets.

We are under no illusion that the global economy generally remains in very poor shape with worrying levels of corporate and sovereign indebtedness that by any recognised economic measure are beyond parody.

However, there are always individual companies and sectors that rise above the prevailing gloom and continue to produce relatively reliable profits on a regular basis. These, of course, are where we seek to focus our efforts.

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As indicted at the end of last month’s Quotidian briefing, the most important economic and market-moving news in September was the Federal Reserve’s decision on US interest rates at their mid-month meeting.

According to market commentators, downward pressure on equity valuations in August had been aggravated by concerns that the Federal Reserve would increase US interest rates for the first time since 2006 at this month’s meeting.

In the event, the Fed decided to leave interest rates unchanged and one would be forgiven for thinking that that was good news. However, the same voices that had predicted the end of the world if rates had been increased now changed their tune and put a profoundly negative spin on the decision to postpone any rate rise. Having gently recovered and moved upwards again in the early weeks of September, the market was hit once more by a tsunami of negativity following the Fed’s announcement.

The explanations for this irrational reaction varied between:

  • It must mean that the US economy is a lot weaker than the Fed is letting on. 
  • The Fed is worried about making the financial and political turmoil in Europe and the Middle East even worse (with 
potential knock-on effects on the US economy).
  • The Fed doesn’t want to make the US dollar even stronger and thereby make US goods and services even less competitive. 

  • As interest rates rise so the cost of repaying debts will rise for the already heavily leveraged governments in Europe and 
the Far East and the Fed doesn’t want to potentially cause a new and even larger global sovereign-debt crisis.

Whilst some of these assertions are no more than guesswork and others may have a degree of merit they are not, in our view, sufficiently persuasive to justify the major equity downgrading that then occurred.

It is worth remembering that the Federal Reserve has two main purposes;

Firstly, its role is to maintain the unemployment rate in America at or close to its long-term average of 4.9% (the official unemployment rate in the USA is currently 5.1% having been at nearly 10% as recently as 2012).

Secondly, the Fed is responsible for keeping inflation under control (and that is deemed to mean at an annual rate of 2% on average). Inflation in the US is currently lower than that figure and the Fed would like it to increase to their target range.

Janet Yellen (the Federal Reserve Chair) is, of course, well aware of the pervasive impact on society generally (and particularly those who are reliant on pensions and savings to generate their income) of over six years of zero interest rates. She would clearly like to make a relatively modest increase in interest rates at this stage of the economic cycle and it is very likely that rates will increase marginally before the end of 2015. Given what has happened over the last six weeks this should now be received as a positive move by the equity markets.

One important effect of this long period of low interest rates has been the impact on income generated by pensioners. Many investors (especially the elderly) have been prepared to take a much higher risk profile in their investment strategy in their search for worthwhile returns. This has been and will continue to be another positive for stock-markets.

However the latest Chinese economic data issued towards the end of September wasn’t encouraging; new orders are falling, output is falling, employment is falling, and prices are falling. In particular, China’s Purchasing Managers Index sank to a reading of 47 in September from 47.3 in August and now sits at its lowest since March 2009. As a consequence, global equities are continuing to fluctuate wildly in the short term and have contributed to the current air of pessimism.

Up until now the Healthcare and Biotech sectors have been areas of the market which have remained buoyant and immune from pricing gyrations. It is no coincidence that the Quotidian Fund has been focused therein. However, in the last week of September even that segment of the market was very aggressively marked down.

We saw seven successive days of downward revision of prices in Healthcare and Biotech shares and three of those days were very steeply negative. As a result, we believe that stocks in those sectors are now grossly oversold and we expect a strong rally in the weeks and months ahead.

On 30th September the FTSE 100 closed at 6248 (which equates to – 7.68% for 2015 to date). This represents a decline of 2.98% in the hyper-volatile month of September.

By comparison the Quotidian Fund at the end of September was + 9.19% for the year to date, having declined 4.90% in the month. Despite this downward revaluation, we remain 16.88% ahead of our benchmark (the FTSE100 index).

In October the third-quarter earnings season will be upon us and it will be nice to get back to talking about products (supply and demand), profitability and economic reality instead of political matters. Many analysts have lowered their forecasts for corporate profits and earnings per share. If the reality turns out to exceed these forecasts then it will add another much- needed boost to equity valuations.

We therefore believe that the FTSE will end this year significantly higher than its current subdued level and much closer to the 7000 point level it last achieved in April. Similarly, we anticipate that the US market (and especially the Healthcare and Biotech sectors) will move higher from here.