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Quotidian Investments Monthly Commentary – March 2016

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April 7, 2016

The main market-moving issue of any real note in March related to the European Central Bank President Mario Draghi who, together with his fellow EU policymakers, convened in Frankfurt on 9th March with a view to creating yet another “whatever it takes” plan in an effort to bolster the Eurozone’s financial strength.

Blissfully ignoring the fact that none of their previous programs had met their intended objectives (in particular, for three years now annual inflation in the Eurozone still lags the ECB’s 2% target rate) Draghi seemed determined to give markets everything they wanted at this latest policy meeting. The result was that they:

  • Cut the ECB’s refinancing rate to 0% from 0.05%
  • Cut the EU’s deposit rate to 4% from 0.3%
  • Expanded the EU’s Quantitative Easing program (QE) to 80 billion euros per month from 60 billion…a figure that trips easily off the tongue but takes on a more shockingly profound focus when you write it down and consider the number of zeros involved
  • Added euro-denominated investment-grade corporate bonds to the list of ‘assets’ the ECB can buy with its QE freshly printed money
  • Extended the projected end date of QE to at least March 2017 from September 2016…with the implication that it will be further extended beyond that in due course
  • Launched four new “Targeted Longer Term Refinancing Operations” (targeted loan programs designed to encourage banks to lend to the real economy).

It does seem rather quaint that the ECB feels the need to incentivise banks to actually perform the very function they are in business to do. Somewhere along the line banks seem to have forgotten that the fundamental cornerstone of their business is lending; it appears that they much prefer to pursue a range of non-banking related avenues as a means of increasing their revenue and profits (although they don’t seem to be much good at those either unless they’ve rigged the relevant markets).

In short, Draghi tried to do everything he could to signal that monetary policy still has potency but he now runs the risk of exposure to the law of diminishing returns. As has been clearly evidenced from rounds of QE in other parts of the world, despite those massive infusions of easy newly-printed money policymakers around the globe are still missing their own inflation targets.

That’s not just my view, by the way: it is also the assessment that the International Monetary Fund and the Organization for Economic Co-operation and Development have both concluded.

None of the ECB’s actions actually solve the fundamental flaws in the single currency of the Eurozone. They treat some of the symptoms for the short-term but do not cure the disease.

In the USA, the Federal Reserve held their latest meeting on 16th March and as entirely expected they decided to leave US interest rates unchanged.

Specifically, the post-meeting statement said that “household spending has been increasing at a moderate rate,” that the “housing sector has improved further” and that there has been “additional strengthening of the labour market.” It also said that prices might be low now, but they should rise “as the transitory effects of declines in energy and import prices dissipate and the labour market strengthens further.”

Consequently, the Federal Reserve lowered their projection on the number of rate increases they are planning to implement this year. The expectation now is for just two very modest rises compared with four previously.

Despite that clear message the markets reacted badly and in knee-jerk fashion to just one US analyst’s contradictory report implying that he expected an additional rate increase to be applied in April. That caused another bout of wild short-term swings in the US markets which then infected global markets.

As the resulting uncertainty continued to reverberate around stock-markets worldwide, Janet Yellen felt obliged to firmly re-state the Federal Reserve’s position. Her very dovish comments have finally led the markets to conclude that near-term rate increases will not happen and they have restored a sense of calm. It would seem that the blindingly obvious has to be repeated a multiplicity of times in order to penetrate the grey matter of some financial journalists and market-makers.

In fact, the Fed funds futures are not even factoring in an interest rate rise until December of this year indicating that the Fed’s June meeting will be yet another non-event.

On 31st March the FTSE 100 closed at 6174 (a fall of -1.09% for the 2016 year to date).  

By comparison the Quotidian Fund’s valuation at the end of March is down by –15.43% for the year to date; that reflects a positive return for March of +7.47%. As indicated in our most recent reports, we are entirely confident in the constituent parts of our current portfolio and anticipate positive progress to continue further.

The remaining headwind to our upward momentum this year has been the muted performance from our holdings in the Pharmaceutical and Biotech sector. Historically this sector has been highly successful for us for many years but has been subjected to unjustified negativity since the start of this year.

However, the tide is now turning in our favour again which underpins the confidence I mention above. A detailed summary of our liking for this particular sector was contained in my October 2015 monthly report.  

On the horizon, of course, the EU referendum is looming in Britain and that is likely to provoke short-term uncertainty the UK markets.

The quality of the debate between the ‘remain’ and ‘leave’ factions has thus far been depressingly low to non-existent. The status quo side seems to be content with scare tactics underpinned by questionable figures (much of which have been stage-managed or belatedly seen to be based on fallacy) whilst the ‘enough is enough’ campaign is fractured and seemingly incapable of creating a coherent strategy.

No serious mention has yet been made of Europe’s disastrous and continuing migrant crisis and its economic, social and safety implications. Neither has there been any focus on the inherent problems of the common European currency and its adverse economic effects, particularly on unemployment.

One of the few facts that we can rely on from official and dependable sources is that the latest UK trade figures show a record deficit with the EU. They confirm a trade deficit of £8.10 billion in January alone and of £23 billion in the last three months. That would appear to indicate that the UK is a far more important trading partner to the EU than the EU is to the UK. So much for the ‘vital importance’ of the free trade link with the EU that has been trumpeted by the pro-EU faction.

In light of just those trade numbers (let alone the ongoing migrant issues and the Euro with its ‘one size fits all’ philosophy) one questions why the UK could or should feel the need to remain in an excessively bureaucratic, anti-democratic, demonstrably corrupt and economically bankrupt alliance.

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