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Quotidian Investments Monthly Commentary – April 2017

May 8, 2017

April has witnessed further examples of the negotiation techniques favoured by Donald Trump and with which we are becoming increasingly familiar.

For the 2016 year the US trade deficit with China stood at a very substantial $347 billion.  With a view to redressing this imbalance, in his immediate post-election speeches Trump accused China of chronic currency manipulation and threatened to impose a 45% tariff on Chinese imports. 

However, during their meeting earlier this month China’s President Xi Jinping offered concessions for better US access to China’s financial markets and agreed to open up access to the Chinese market for American beef producers too.  Clearly the US is a hugely important export market for China and so it made Trump’s deliberately heavy-handed approach more likely to bear fruit.  I think it’s fair to say that, initially and on the face of it, this is a positive and promising result for Trump and his tactics.

On the other hand, Trump’s attention has now turned to Canada which is the world’s largest importer of US products and the most important foreign market for 35 out of the 50 individual US States.  In fact, Canada is one of the few nations that the US enjoys a trade surplus with (exporting $337.3 billion worth of goods and services to Canada against imports of $325.4 billion); a surplus of nearly $12 billion.  According to data from the US Department of Commerce, America’s exports to Canada support an estimated 1.7 million US jobs.

US-Canadian relations are quickly deteriorating, though, as Trump intensifies a trade dispute with the Canadians by foisting tariffs of up to 24% on imports of lumber from Canada.  Apparently this escalating trade war is in retaliation for recent changes in Canada’s dairy policy that US milk producers claim violate the North American Free Trade Agreement (NAFTA). 

Trump’s standard approach of threats followed by reasonableness is potentially less helpful when the boot is on the other foot.  Given that the trade surplus with their northern neighbours is currently biased so far in the US’s favour, his administration would be well advised to consider more carefully how it proceeds to re-negotiate trade policies with the likes of Canada.  History shows that ‘protectionism’ in any form simply leads to unhelpful tit-for-tat trade wars which ultimately benefit no-one at all (a point that the EU bureaucrats would also be wise to heed).

On 30th April 2017 the FTSE 100 closed at 7203.94(a fall of-1.62% for the month) and now stands at only +0.86% for the 2017 year to date.  By comparison the Quotidian Fund’s valuation on the same date shows an increase for the month of April of +5.54%and for the 2017 year to date the Fund is now up+21.29%.

April has seen yet another resurgence of how European stock-markets in particular are still in thrall to political issues rather than simply to economic concerns.

In the UK, on 19thApril Theresa May surprised markets by announcing a snap General Election to be held early in June.  Markets were caught entirely on the hop and have largely reacted in a negative fashion simply because they dislike uncertainty.  Whilst the outcome of this election is a foregone conclusion and will certainly strengthen the UK’s hand in negotiations for Brexit, markets are likely to remain subdued and in a narrow trading range until the voting is over and the result confirmed. 

The second round of the French presidential election was held on 23rdApril.  The first round last November had produced an apparently decisive lead for Francios Fillon, the middle-right Conservative candidate, and running second was Marine Le Pen, the far right Nationalist nominee.  Both of these contestants are determinedly anti-EU.  However, following a concerted media-led and politically motivated campaign to discredit Fillon and promote Emmanuel Macron, a pro-EU entrant who had finished a distant third in the November primary round but was heavily favoured by the Brussels bureaucracy, the second round saw Macron pip Le Pen (both of whom now go on to contest the final round on 7thMay) whilst Fillon was a close up third and thus knocked out of the race.

Initial stockmarket reaction was very positive but illogically so. Markets across Europe rose by 4% on 8thMay as if all the economic ills of France (and indeed of the EU) had disappeared at a stroke.  Economic reality will reassert itself to European equity valuations soon enough.

The relevance of all this is that Macron is now the strong favourite to prevail and become the next President of France; he has already made it clear that he will not make the Brexit negotiation process a straightforward or reasonable one and whilst Brexit still remains a focal point of investor’s concerns in the UK it is likely to continue to be the cause of short term volatility. 

Elsewhere, and on a more positive note, Trump’s much heralded tax reforms in the USA have now been tabled and will go through the legislation process early in May.  The intention is to cut Corporation Tax from 35% down to 15%, to radically simplify the labyrinthine system of US Income Tax into just three simple rates of tax (10%, 25% and 35%) with more generous tax reliefs, and to repeal the death tax (the US version of Inheritance Tax). 

There is abundant historical evidence to support the case that such reductions and simplifications actually have the effect of increasing the overall tax-take (the concept known as The Laffer Curve). Not least, Trump’s new proposals are designed to encourage those US companies who currently avoid paying tax in America by establishing their tax domicile elsewhere, to return home and make their contributions to Uncle Sam.

Likewise, by putting more discretionary income into the hands of US consumers, there will be an increase in the tax revenue via the US Sales Tax (essentially their version of VAT) as that money is spent.

Despite that, the usual anti-Trump voices have already been raised in protest against this new tax system and it will no doubt have a rough ride through the House of Representatives and the Senate.  It seems that anything to denigrate Trump is the prevailing theme in Washington and if that means ignoring any supporting evidence in his favour in order to criticise and frustrate positive progress then so be it. 

Ultimately, though, I do think the new tax system will be adopted (in part if not in whole) and the expectation of such positive tax reform has been one of the drivers of the recent US stockmarket ebullience.  In some eyes, Trump still remains a figure of fun but there is no doubt that since he took office equity markets in the USA have been and continue to be very positive.  Long may it continue.

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