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Quotidian Investments Monthly Commentary – January 2020

February 21, 2020

In the early part of January the positive momentum generated during the last quarter of 2019 continued to drive equity markets upwards. Out of the blue though, in the final ten days of the month, we have all become experts on a new strain of Asian flu that has emerged without warning from one city in China.

This fresh species of a coronavirus-based illness has created a level of concern bordering on panic that nowadays seems to be the default setting for any renewed outbreak of flu-like symptoms.

From the detail that has been released thus far, the medical profession has already stated that this type of coronavirus is not as strong and not as dangerous as the outbreak of Sars (itself a version of coronavirus) which also emanated from China in 2003 and created similar levels of hysteria.

Despite that, within the first ten days of its appearance, the World Health Organisation has declared a global coronavirus emergency. However, to put that into perspective, the WHO has declared a global health emergency on six other occasions in the past 10 years but, strangely, the world has not yet ended. No doubt it works on the basis that the more times it presses the emergency button then the more chance it has of getting one right.

Naturally, this scaremongering has caused doubt and uncertainty across global stock-markets and, of course, market-makers need no encouragement or excuse to take a red pen to equity prices. The positivity of early January has therefore been temporarily stopped in its tracks.

On 31st January 2020 the FTSE100 index closed the month at 7286.01, a fall of -3.40% in the month of January and, of course, it also stands at -3.40% for the 2020 calendar year too. By comparison (despite the sell-off which began on 24th January) the Quotidian Fund’s valuation at the 31st January shows an uplift of +2.37% for the month of January and it follows that the Fund is up +2.37% for the 2020 year thus far.

This outperformance as measured against the FTSE100 and other global markets is simply a function of our oft-stated aim of trying to be in the right sectors of the right global markets at the right time. The US markets continue in the vanguard of global equities and it remains apparent that the technology sector shows the way.

In vivid support of that assertion, the 4th quarter 2019 results season is in full swing and 12 of our 19 individual company holdings have reported their figures so far. Of these, 11 have declared better than expected performance and we anticipate similarly positive returns from the remaining 7 who will be reporting in February.

Even in face of the coronavirus-inspired reductions elsewhere, share prices in these organisations have been based on solid growth figures and continuing positive profits and have remained largely resilient.

For the past three years we have been holding shares in a number of Biotech and Healthcare companies and they have done well for us. Recently, however, they’ve gone off the boil and so we’ve sold those holdings and taken a breather on that sector.

A factor in our decision-making is that the US Presidential election is on the horizon (November this year) and historically biotech and pharmaceutical companies have had average to poor performance in election years. In the belief that they will be appealing to the large number of US voters who are paying high prices for unnecessary medicines, US politicians tend to ‘promise’ that if they’re elected then they will cap drug prices and regulate pharmacological companies. The inevitable result of these politically motivated pledges is to cause volatility and a downward shift in equity pricing in the biotech and pharma sector

Until real evidence emerges to disprove our view that the latest appearance of a coronavirus is yet another temporary discomfort to the human race then we will continue to regard it as an economic inconvenience which will have only a short-term effect on share valuations.

What little evidence we have at this early stage allows us to make comparisons with similar over-hyped health-scares in the relatively recent past.

For example, the Sars outbreak in 2003 also began in China (as did swine fever and bird flu) and all were treated at the time as world threatening events. Ebola, originating in Africa, was similarly over-stated.

The reality is that from a world population of 6.36 billion people in 2003 there were 8437 recorded cases of Sars infection from whom (in the entire world) there was a grand total of just 813 deaths. These figures come from the WHO. (who, as ever, had led the charge in describing this as a global emergency).

In 2020 the world population is now 7.79 billion people and, as I write this, there have been 14380 reported cases of coronavirus infection and 304 deaths (only one of which has been outside China….in the Philippines).

During and after the Sars outbreak it was calculated that there was a period of 6 months between infection and containment and so we have no doubt that the figures for infections and deaths from this coronavirus will continue to rise. However, the mortality rate from coronavirus infection has been calculated to be just 2% and respected figures in the medical profession have announced that a vaccine has already been developed (in record time) to counter this incidence of coronavirus and it will be in production shortly.

Whilst we see the commercial effect of this coronavirus epidemic as being short-lived there is no doubt that it does and will continue to have an impact in economic terms. The limitations being placed on transport and travel (not only in and out of China) will have an adverse and disruptive effect on industrial supply chains and their “just in time” usage requirements. Restrictions on travel will also cause a suppressive effect on consumer activity. In spite of that we believe that the markdown of equity prices has been over-done and normality (together with commn-sense) will return to equity markets in the near future.

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