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Quotidian Investments Monthly Commentary – April 2015

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May 17, 2015

First quarter earnings reports were in full swing during April and became the main economic focus of the markets.

The banking sector generally benefitted from stronger capital markets which led them to better than expected earnings and profits.

Lower oil prices and a strong US dollar were cited as the proximate causes of some disappointing numbers in those industries relying on the manufacture of consumer products.

Healthcare, however, remains a promising sector to invest in for stability and growth potential.

In aggregate, S&P 500 profit estimates for the quarter have fallen 8 percent since January 1st. This is the largest decline in earnings expectations since the financial crisis in early 2009

At this rate, S&P 500 earnings are expected to drop nearly 5 percent year-on-year, the first outright decline in quarterly profit growth for American blue-chip stocks since 2012.

So far 85 companies in the S&P 500 have announced negative earnings while just 16 have guided estimates higher. Perhaps more troubling still, top-line sales growth is forecast to fall 3 percent this quarter, putting profit margins under pressure.

But some of the best performing sectors so far this year are still expected to post year-on-year profit growth and we have highlighted Healthcare (with expected profit growth of 10.7 percent) beating all other sectors.

On 29th April the usual official government numbers were released and confirmed that US Gross Domestic Product grew by just 0.2 percent in the 1st quarter. That was much worse than the 1 percent forecast of many respected economists and less than one-tenth the 2.2 percent growth rate in last year’s fourth quarter. Very disappointing.

US exports also declined at a 7.2 percent rate courtesy of the strong dollar. In addition, core inflation slowed to a 0.9 percent annualized rate – the lowest rate in more than four years.

Those figures confirm that, as we’ve stated in earlier reports this year, most of the US first quarter economic woes were caused by two factors: falling energy prices and an unfeasibly strong dollar.

One bright spot in the economic releases was the US Employment report which showed that jobs numbers were much better than expected; in fact they were the best employment figures seen for 15 years and a source of some welcome optimism.

Those factors tend to support our earlier assertion that the Federal Reserve is more likely now to delay the start of gentle interest rate increases until later this year.

Indeed, the strategic message from the Federal Reserve was basically unchanged with the slowdown in US growth attributed to “transitory factors.”

The last week of April was relentlessly negative in global stockmarkets, and particularly those in the USA and the UK. We viewed those declines in both jurisdictions as synthetic. In particular, the last trading day of the month saw our equity holdings marked down by 2.50% across the board; a highly unlikely scenario if this was based on genuine economic factors.

Our stance was supported by the fact that, as I write this report, the first trading day of May has seen all those holdings marked up again, strangely, by 2.50%!

On 30th April the FTSE 100 closed at +6.01% for 2015 to date. By comparison the Quotidian Fund finished March at +14.01% for the same period.

The UK faces a General Election on 7th May and the local market is no doubt positioning itself in the event of an unhelpful result. Opinion polls are notoriously unreliable and, if taken too seriously, can lead to inaccurate conclusions. We believe it is prudent not to act prematurely upon a speculative view of the outcome but to wait until the conclusion is clear. Naturally we will take whatever action we deem to be appropriate as soon as we see the factual evidence.  

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