Quotidian Investments Monthly Commentary – July 2015
Mainland China’s Shanghai Index had moved substantially higher in just the 12 month period up to June 2015. An extraordinary gain of 150% was largely made possible by a massive expansion in margin lending, most of it off-the-books (where brokerage accounts can be leveraged up 5-to-1 or more). This, combined with the Chinese penchant for risk-taking (some might call it gambling), led to very considerable over-valuation in many stocks and, of course, of the market itself.
However, and not before time, officials in Beijing finally recognised that stocks were getting overheated and they decided to crack down on margin trading. Since then, shares on the Shanghai stock exchange have plunged about 30%. The China stock market meltdown has accelerated in spite of Beijing reversing course and pulling out all the stops early in July in an attempt to support plummeting share prices.
In the UK, for the past six months many commentators have been predicting a market correction and, given the market’s propensity to allow sentiment to overcome economic reasoning, these predictions often become self-fulfilling. From its peak above 7100 in April the FTSE index had declined to 6400 by 8th July…..a fall of 10% which represents the usual definition of a correction. With their attention drawn to events in Greece and in China, the media do not yet seem to have grasped that fact.
Our historical analysis indicates, though, that it normally takes no more than 56 trading days for markets to recover from a 10% correction. That being so, we have taken short-term advantage of what we see as an oversold UK market.
In America, the Federal Reserve has continued to lay the groundwork for increasing interest rates. The Fed chairman, Janet Yellen, suggested in her July post-meeting summary that the first increase in interest rates would likely come in September. As ever, a few days later a similar announcement was made here in relation to UK interest rates. Unlike the apparent delight in obfuscation and the delivery of surprises which was the hallmark of previous Federal Reserve regimes, this increase (when it comes) has been so well signalled that it shouldn’t cause a real or lasting problem to stock-markets.
Finally, the second quarter earnings reporting season is upon us and is bound to be full of surprises in the weeks ahead. Largely as a consequence of a strong US dollar in the early part of this year it will be a close call on whether or not we see much growth in US corporate profits overall. With that in mind we continue to be ultra-selective in the assets we choose to form the current Quotidian portfolio. Our aim remains to seek the optimum balance between risk management and the achievement of above average investment returns.
On 31st July the FTSE 100 closed at 6696 (which equates to +1.98% for 2015 to date). It represents an increase of 2.69% in the month of July.
By comparison the Quotidian Fund at the end of July was +24.69% for the same period….being an increase of just over 4.00% in July.
In the third week of July alone the FTSE100 dropped by 3% following a negative report from China in respect of that country’s manufacturing output. These numbers caused global commodity prices to decline even further and, as the main UK market index is heavily biased towards energy stocks, miners and metals it took the brunt of the decline.
However, figures from China are notoriously unreliable. In the previous week a set of very encouraging GDP numbers from that country had created a positive reaction in the FTSE100. As ever, the market over-reacts positively to one piece of good news and then over-compensates in the opposite direction to one piece of negative data. And all this from figures that are historically unreliable and will in due course, no doubt, be quietly adjusted.
As stated earlier, we have taken advantage of what we interpret as an oversold market in the UK. If we prove to be wrong in that assessment then we will change our view and our investment positions.
In the US market the overall price/earnings ratio is currently above average at x18.5 but it’s still a long way off the pre-crash P/E ratio of x29. In our view, for the moment there is still profit to be made in equities generally and US equities in particular.
The Quotidian Fund is currently in a position of considerable strength and we remain focused on protecting our gains whilst seeking opportunities to benefit from this period of volatility.