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Quotidian Investments Monthly Commentary – May 2015

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June 6, 2015

By the end of April 356 companies in the USA (representing 80 percent of the S&P 500 by market capital weighting) had posted first-quarter results. Aggregate profits were better than analyst’s forecasts and so provide a reason for guarded optimism.

Fast-paced profit growth, especially in biotech, keeps pushing health care stocks higher (up 24 percent over the past 12 months) and they lead the field in performance so far this year too, up 5.4 percent.

This is further evidence to support our belief in the importance of being selective and focussing on the stocks and market sectors that are delivering the best results and superior performance.

With the UK General Election now out of the way (and having delivered a market-positive result), concerns have now returned to the issue of sovereign debt generally and Greece in particular.

Greece is now at its tipping point. Its government is desperately trying to stave off default on a 750 million euro repayment to the International Monetary Fund.

Whether or not Greece gets short-term concessions will not really matter because in June it faces another 2.6 billion euro repayment and by July and August it will be required to make a further 8.7 billion euro repayment, 7 billion of which is owed to the European Central Bank.

There is simply no way Greece can pay off that debt; it just does not have the money. Merely in order to make a minor 200 million euro payment early in May the Greek government had to call in all excess cash from its regional banks.

Nor can Greece rollover the debt without paying excessive interest rates and thus bankrupting the country even further.

Greece itself is not solely to blame for this crisis. Yes, it has its black market economy and a grossly inefficient system of tax collection but, sadly, in 2001 Greece was effectively forced to join the euro through dubious financial manipulation devised and sponsored by a foreign investment bank.

It is therefore no surprise that it is now having trouble repaying that debt.

The wider issue is that it’s not just Greece that is about to reach the tipping point. Many other European countries are struggling under the burden of worrying levels of sovereign debt.

Whilst Greece is certainly the worst, Italy isn’t far behind and nor is Portugal.

Greece’s sovereign debt is equivalent to 175% of its Gross Domestic Product (GDP). Italy and Portugal are both indebted to the tune of 130% of GDP. Ireland, Cyprus and Belgium all carry debt in excess of 100% of GDP whilst France and Spain are burdened at a level just short of 100%.

If push came to shove not one of these countries is capable of servicing its debt, not even France.

Europe’s sovereign debt crisis is merely the starting point. This crisis is not confined to Europe and one of the most important aspects of the debt crisis as it unfolds over the next few years will be how it impacts the financial markets.

In our opinion government bond markets are fraught with risk and are heading towards the abyss. In recent years we have often described Gilts/Bonds as reward free risk and our view has not changed.  

However, surprisingly and perhaps perversely, the history of sovereign debt crises indicates that stock markets perform exceptionally well when the public sector, not the private sector, is going bust.

Despite all its detractors and its domestic economic problems, in our view the US stock markets currently represent the safest, deepest and most liquid bastion of capitalism in the world. Quite simply, from a financial perspective the USA’s biggest companies will outlast its government.

On 31st May the FTSE 100 closed at +6.37% for 2015 to date. By comparison the Quotidian Fund at the end of May was +21.69% for the same period.

That is a quite remarkable achievement at this stage of 2015 and positively reflects the strength of our focussed approach to stock selection based on our strategy of aiming to be in the right sectors of the right markets at the right time.

We are obviously aware, though, that markets can make one look very foolish very quickly and so we remain dedicated to the task at hand with the intention of maintaining our pre-eminence over the market index.

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