Quotidian Investments Monthly Commentary – February 2021
A significant feature of the 2021 investment year to date has been the extreme volatility of equity market pricing despite the latest positive corporate results season. In the USA particularly, only the Oil & Gas and Utilities sectors have witnessed disappointing sales figures and (with the sole exception of Utilities) every market sector has issued very positive (mostly double-digit) earnings figures too, well ahead of analyst’s expectations.
I mentioned in our January report a phenomenon which has not been particularly obvious in the past and that is the concerted action taken by a large group of internet social-media based investors acting in unison and in blatant attempts to manipulate market prices. Their stated aim, apparently, was to ‘punish’ those large financial institutions who make substantial profits by short-selling (selling shares they don’t own in anticipation that they are over-valued and with a view to buying them back after their price has fallen, thus making a profit).
The naivety behind the ostensible objectives of this group of modern-day Robin Hoods is palpable. Yes, of course, stock-market pricing is subject to the laws of supply and demand but (as anyone who has tried to manage an equity portfolio can attest) it is also subject to the greater force of The Golden Rule (which asserts quite simply that those who have the most gold make the rules!).
In the long term, (as was famously stated some years ago by our last economically competent Prime Minister; she of the golden coiffure and halo) “you can’t buck the markets” but, in the short term, you can cause mayhem in market-pricing mechanisms. The absurdity of the joint collaboration and actions of this group can best be illustrated by the fact that, on one day alone (24th February, and in just the last hour of that day’s trading) the share price of GameStop (one of the main targets of their market abuse) increased by 100%. Incredible. It will, no doubt, continue to gyrate wildly until their vain attempts to rival King Canute are eventually washed away by the incoming tsunami.
Whilst this self-satisfied, woke (and therefore always right-on and right) gang of investment ‘celebrities’ roam the internet righting perceived wrongs and causing short-term disruption might deal in millions of dollars, the big boys (those who are really in control of markets) deal in trillions and have the firepower to swat these parvenus at will. The Force will indeed strike back and there will be some long faces, rapid faeces and empty pockets from those arrivistes when faced with surprisingly large margin calls. Sympathy will be in short supply.
For those of us who live in the real world and make investment decisions based on the cold reality of economics, these self-righteous and self-serving pretenders are causing unhelpful disruption and are fundamentally a pain and, rather neatly I think, a pain in the fundament too.
On 28th February 2021 the FTSE100 index closed the month at 6,483.40 (a rise of 1.18% in the month of February) and it stands up 0.35% for the 2021 calendar year to date. By comparison the Quotidian Fund’s valuation at the 28th February shows a rise of 0.28% for the month and it means that the Fund is now up 0.18% for the 2021 year to date.
Sadly, politics has yet again muscled its way into this month’s report simply because a specific theme from that arena has an important relevance to the investment world.
As if we didn’t already know enough about the EU’s blinkered arrogance, self-interest, protectionism, gross inefficiency and intransigence, this month has shown us the scale of its sheer vindictiveness and spite in relation to its post-Brexit dealings with the UK.
The EU’s breath-taking willingness to weaponize the Good Friday Agreement (the main conduit of peace in the Province of Northern Ireland for the past 20 years) by threatening to scrap it in an attempt to blackmail the UK into sharing Covid vaccines (that they had totally failed to make their own provisions for) was an unwelcome surprise. The sense of entitlement that came with this act of attempted larceny was vomit-inducing.
Its bombastic demands to fishing rights in UK waters whilst refusing to allow shell-fish caught in those same waters to be sold into the EU rather smacks of quite deliberate churlishness, confused thinking or double standards.
But the thing that concerns us most and could have a negative bearing on future investment facilities is that the EU has refused to grant “equivalence” to the UK (in other words, to recognise that the UK’s regulatory regime in respect of finance and financial services is at least as good as the EU’s).
The UK has long agreed that a wide range of EU businesses can serve UK customers by accepting that the EU’s regulatory regime is the equivalent of ours in 17 areas of finance and financial services. In return, the EU has allowed the UK only 2 areas of equivalence.
Strangely, though, the EU has seen fit to grant much wider ‘equivalence’ to such upright, law-abiding and morally above reproach financial powerhouses as Brazil, Albania, Mexico and China but, seemingly, the UK is beyond the pale.
Of course, this is nothing more than a very thinly veiled attempt to remove the City of London as Europe’s financial hub and replace it with Paris and/or Frankfurt. As Andrew Bailey, Governor of the Bank of England, asserted earlier this month in relation to financial services: “A world in which the EU dictates and determines what rules and standards we have in the UK is not going to work”. Quite right too.
This is the cowboy outfit that spent four wasted years of Brexit negotiations insisting on the vital and potentially deal-breaking importance of level playing fields (but happily turning a Nelsonian eye if any of these fields were already sloping in the EU’s favour) and the absolute need for everything to be overseen and ruled upon by the EU yes men who control the European Court of Injustice and ensure that every decision is found in the EU’s favour.
Perhaps surprisingly, the fundamental requirement of a capitalist society is pain-free access to capital markets. The EU is a socialist (communist) based project and it doesn’t have the skills, the expertise the infrastructure or the financial strength to challenge the City’s dominance. That, however, hasn’t stopped them from trying to find more devious ways to achieve its desired end-game. Currently, for example, EU shares can be traded on USA stock-exchanges but not on UK markets.
Brussels has past form in this context that the UK can learn and benefit from. In June 2019 the EU revoked Switzerland’s ‘equivalence’ in financial services as a punishment for it refusing to be bullied into accepting various EU inspired political commitments.
Switzerland immediately responded by making it illegal for EU traders to deal in Swiss equities through any market other than the Zurich stock exchange. It was a mistaken and classic lose/lose response founded on revenge and it still leaves a bitter taste on both sides.
Based on the mantra that revenge is a dish best served cold, instead of retaliating and turning this issue of ‘equivalence’ into a long drawn out saga with no clear winner at the end, the UK would do well to learn from Switzerland’s mistake and outwit the EU’s shameless tactics with a better thought-through strategy of our own.
Whilst we were members of the EU we were forced to accept a raft of unnecessary, restrictive and pointlessly bureaucratic legislation and ever-changing regulatory practice notes which added to the costs and paperwork of doing business in the financial sector for no obvious benefit to either the client or the service provider.
The collective noun for EU politicians and functionaries is ‘a constipation’ but following the restrictions of repetitive lockdowns and, given the paltry to non-existent returns available from other asset classes, there is a pent-up demand globally for equity investment. The finance industry’s dilemma, therefore, is how to achieve a positive balance when financially incontinent and willing investors meet the constipation of blinkered and grossly over-regulated EU bureaucracy!
The EU’s anti-business measures (which include Mifid 1 and Mifid 2) together with pathetically small-minded solvency requirements (applied whether or not client’s money is at risk) should be repealed together with the long-standing imposition of Stamp Duty and any transactional taxes on financial dealings (which produce only a tiny amount of revenue for the UK Treasury – circa £3 billion per annum) but have been a bugbear and an anti-competitive point of contention in the financial industry for many years.
Of course, regulation of financial services is required in order to avoid the potential descent into a Wild West scenario but this regulation should be light-touch in its nature and common-sensical and business-friendly in its application.
In short, the UK should become the “Singapore-on-Thames” that the EU has always feared it would and (unlike Switzerland) we could then pursue the path that would maximise the new freedoms that Brexit has given us. Light but intelligent and effective regulation and a low tax regime that rewards ingenuity, effort and risk-taking. Does the UK government have the appetite, the will and the guts to do so? It certainly should.
Quarterly corporate results have now been released for all of our asset holdings and they have all produced sparkling sales and earnings figures across the board. We are therefore confident that our reorganised 2021 portfolio will be fit for purpose in the post-Covid world. Of course, as an inherent feature of stock-market investment there will be volatility and occasional markdowns but, for the time being, we are content with our portfolio as it stands.
It is a matter of temporary irritation that the wild unpredictability in certain sectors that is being caused by the actions of the group of social-media based investors (referred to earlier in this report) acting in concert and blatantly manipulating certain shares are creating unnecessary knock-on effects in their wake.
For example, in the past two successive months the Quotidian Fund’s performance has been muted by these false markets. In January, the fund’s investment performance had risen by a little over 6% during the month but a severe, synthetic mark-down in the final hour of trading on the last trading day of January took us back to all square for the year.
Frustratingly, the same thing has happened in February; a 6%+ advance intra-month has been reduced almost to parity by month-end on the back of a similar mark-down, but this time on the penultimate trading day of February. It is evidently false pricing and will be short-lived.