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Quotidian Investments Monthly Commentary – November 2017

December 12, 2017

Equity markets continue to be generally uninspired and in the doldrums.  Advances in US markets are followed by retrenchment and any stockmarket gains to a UK investor are being largely negated by a weakening dollar.

In the UK, deliberate political obstruction encouraged by a lack of leadership, clarity and purpose in relation to Brexit, combined with increasing instability related to the potential of a hard-left Labour party being voted into power, continue to suppress equity markets here far more than economic issues.

The EU’s political leaders and negotiators are being allowed, unfortunately, to dictate terms, retain the initiative and set the agenda.  It is evident that their main aim is to extract a huge amount of money under the guise of a divorce settlement, to create a number of ‘impossible’ conditions and impose artificial timescales in the hope that they can eventually crank up sufficient pressure to circumvent Brexit altogether. 

As ever, the EU remains strangely silent on its current sources of taxes and positively mute on its areas of expenditure (the consumers of their tax revenues).  As best one can see of the financial position of an organisation whose accountants have steadfastly never been prepared to sign off audited accounts, the EU has thus far run up a vast level of debt and, despite that, has already committed itself to further huge expenditure in the future.  Vanity knows no bounds.

Live now, pay later seems to be the mantra.  The most reliable figure we have (courtesy of William Hague) is that the EU is underwater to the tune of 250 billion euros.  No wonder they have invented such an enormous divorce bill.

Perhaps the UK’s negotiating team should stress the importance of the UK to the EU by reminding  themselves and their counterparts across the channel that:

  • The UK represents 16% of the EU’s GDP
  • It comprises just 13% of the EU’s population
  • Yet only 3.50% of the EU’s officials are British
  • Britain is also the 2ndlargest net contributor to the EU coffers
  • The EU comprises just 20% of the global economy
  • The costs of complying with EU bureaucracy are estimated to reduce UK GDP by 7%
  • In 1999, 61% of the UK’s total trade was with the EU; the latest figures show that it’s now only just over 40%. Ergo, just about 60% of UK trade is already now with the rest of the world
  • There is a large defecit on the UK’s trade with the EU
  • There is a substantial surplus on the UK’s trade with the rest of the world
  • Current political chaos in Germany, Italy and Spain threatens to derail ‘the EU project’

Sadly, the EU’s negotiating tactics (not only with Brexit) are characterised by ferocious campaigns of truth reversal and character assassination. These campaigns are used simply to create an illusion of mass support in order to better manipulate and intimidate people.  They are based on sustained misinformation, unevidenced allegations and downright lies. Our friend Juncker continues to make himself look foolish; but then again he’s had plenty of practice.

Finally on the wearisome topic of Brexit (and it appears regularly in our reports simply because it continues to be the most important influence currently on the UK equity markets).  In an interview early in November, James Dyson, an excellent businessman who has an impeccable record of invention and solid achievement, stated that years of experience had taught him that you simply cannot negotiate with the EU.  In his view, Britain should just walk away and “they will then come to us simply because they need to sell us their goods”.

It is readily apparent that the EU’s negotiating style is to test the UK’s resolve to breaking point. Whenever past referenda outcomes have gone against them, the EU has used the same tactics in order to achieve a reversal of the democratic result and so they are used to these devices ultimately leading to capitulation.  From the UK’s perspective, the EU must therefore be made to understand that we are not bluffing and to achieve that goal they must be brought to a realisation that the the UK will indeed walk out of negotiations, whatever EU threats (and empty threas they are) may be made, if an equitable deal is not made available.

One should also beware of the rather sleazy EU phrase “nothing is agreed until everything is agreed”. This is also just a tactic to wear down the opposition.  In the last few days of November there is a suggestion that the divorce settlement figure has been agreed.  In our view, that is far from the truth.  In due course the EU will revisit that number with a view to pushing it even higher.

In addition to that, the financial reality is that when the second largest net contributor to the EU Treasury leaves the European Union the remaining 27 members are left with the dilemma of whether to cut their budgets or increase the national contributions of each remaining country.  It is not in their political DNA to cut budgets!  That is the root cause of their desperation to extract a substantial and unsubstantiated divorce settlement.

There has been a distinct movement to the political right in various recent elections and referenda throughout Europe.  Perhaps the imminent unseating of the once all-powerful Angela Merkel will add velocity to this trend towards the conservative (small ’c’) ideal of free trade.  It can only benefit European and UK equity markets if that happens.

On 30th November 2017 the FTSE100 closed at 7326(a fall of– 2.22% for the month) and it now stands at only +2.57% for the 2017 calendar year to date.  By comparison the Quotidian Fund’s valuation at the same date shows a rise of +0.17%for the month of November and the Fund is now up+32.33% for the 2017 year to date.

The Quotidian Fund has the facility to short equity markets with a view to making profits in falling markets.  However, our overriding principle is that we seek to expose the Fund to risk (either long or short) only when we perceive an established trend, either positive or negative, and the potential opportunity for significant profit.

For the past six months global markets have been generally going sideways and are presently constrained within relatively narrow trading ranges.

We therefore take our cue from The Grand Old Duke of York; when we are long (buying the market) we are long and when we are short (selling the market) we are short, but when we are only halfway up (if we deem the risk/reward ratio to be unattractive) then we are out,  unexposed to stockmarket hazards and unseduced by the temptation of what would likely turn out to be return free risk.  Keeping the powder dry until a better balance of risk emerges.

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