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Quotidian Investments Monthly Commentary – April 2016

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May 5, 2016
Equity markets around the world were focused on two main issues in April; the flow of quarterly corporate results and the potential of further central bank financial accommodation by way of quantitative easing.

First quarter results began to filter through from 10th April onwards and the initial signs were positive. As the results season gathered pace the number of positive earnings and profit ‘surprises’ injected a little more confidence into equity valuations. Indeed, by the third week of the month the FTSE came into positive territory for the first time this year as it rose above its 31st December 2015 closing level. Similarly, major markets around the world rallied to 2016 year highs. However, this uplift was not to last.

The Bank of Japan had been expected to announce a further round of financial ‘stimulus’ having pledged earlier this year to do anything and everything to eliminate that nation’s economic ills. Japan’s economy is on the cusp of slipping back into recession for the fifth time since the Great Recession of 2008/9 and, in terms of deflation, Japanese prices dropped by another 0.30% in March (their largest decline in three years).

Indeed, earlier this year the BoJ had continued its Quantitative Easing programme by printing hundreds of trillions of yen to buy up everything from government bonds to stock market ETFs to Real Estate Investment Trusts. In addition, having kept interest rates at near zero for many years it cut them into negative territory in January.

In the event, overnight on 27/28th April the BoJ presented global markets with a very unwelcome shock. It didn’t boost the size of its 80 trillion yen-per-year QE program as had been fully expected, it didn’t lower its negative -0.1% benchmark rate any further and it didn’t buy even more equity ETFs in order to maintain stock-market support (in other words, it didn’t continue to artificially manipulate the Japanese market higher).

As a result, the Japanese benchmark equity index (the Nikkei Stock Average) initially dropped by 3.6% and continued to fall, putting substantial downward pressure on worldwide markets throughout 28th and 29th April. The demonstrable failure of QE and the policy of negative interest rates in Japan has called into question the efficacy of similar stimulus programmes elsewhere (particularly in Europe)

Typically and tediously global markets reacted in knee-jerk negative fashion to the BoJ’s lack of action and we were treated to yet another bout of wild short-term swings in the US and European markets. These were exacerbated by the fact that, with the long holiday weekend upon us, market makers preferred to mark prices substantially down and pause for thought until trading desks resume after the May Day holiday.  

At 30th April, of the 325 companies from the S&P 500 that had thus far reported their results, 249 had produced positive figures in excess of market expectations. Indications on the flow of future earnings were largely upbeat too and so the likelihood is that this should help to lift equity valuations again when markets re-open.

On 30th April the FTSE 100 closed at 6241.89 a fall of -0.01% for the 2016 year to date.  

By comparison the Quotidian Fund’s valuation at the end of April is –14.72% for the year to date (which reflects a positive investment return for April of +0.84% (a figure which had been much higher before the temporary markdown in the last two days of the month).

On the horizon, of course, the EU referendum is looming in Britain and that is likely to provoke further short-term uncertainty and volatility in the UK stock-market. With that in mind we took the opportunity whilst FTSE was in positive territory for the year to close our holdings in that at a profit (albeit a small profit). We will be seeking to re-establish holdings in the UK market when an appropriate prospect for profit arises.

The debate between the ‘remain’ and ‘leave’ factions continues to be turgid with neither side seemingly prepared to focus on the real issues. As the outcome of the referendum will become the main focus for markets over the next seven weeks we feel it appropriate to consider and comment herein on the relevant issues and facts.

In our view the main issues of importance to the UK and its voters are:

  • The impact on UK trade and commerce of the decision either to leave the EU or to remain.
  • The financial and social impact on the UK of unrestricted immigration both now and in the longer term
  • The effect of an exit vote on Britain’s defence and security.

Taking each of these in turn:

I highlighted in last month’s report the significant trade imbalance between the UK and our EU trading partners (which is hugely unfavourable for the UK). We are told that the EU market represents approximately 44% of the UK’s trade. What has not been made clear is that this figure has actually been declining for many years; where once the EU was responsible for around 55% of the UK’s trade that position has slowly been eroded.

It obviously follows that approximately 56% of the UK’s trade is with markets outside the EU bloc.

Sadly, the leaders of the ‘remain’ faction have been more intent on trying to produce scare stories rather than any worthwhile information or debate. The quite ridiculous and perfidious pamphlet produced last week by George Osborne epitomises their blatantly one-eyed approach. Their tactics gave every impression of having started with their desired conclusion and then working backwards making use of manipulated assumptions and deliberately distorted figures (whilst also ignoring any positive data) in order to arrive at their required answer.

On the opposite side of the debate, last week a group of serious and highly respected economists produced a much more credible report which concluded that the UK (if free of the EU’s trade barriers) would benefit from a 4% increase in GDP.

Another report produced and signed by 110 competent and respected figures in the financial world stated that London would actually strengthen its lead as the world’s biggest financial hub if the UK did exit from the EU. It asserted that increasing regulation from Brussels posed a significant threat to Britain’s financial services industry and that the UK would be better off outside the EU. We are under no illusion that the EU would prefer to see Frankfurt replace London as its financial centre.

No mention whatsoever has yet been made of the trading opportunities inherent in the British Commonwealth countries. This group of 53 sovereign countries (who are members of the Commonwealth by choice not by diktat) comprises a population of 2,357,512,000 people and growing whereas the EU bloc has a current population of 508,191,116. Even before we consider the opportunities for trade presented by the USA, China and other emerging markets we have an enormous untapped trading resource within the Commonwealth.

Despite Mr Obama’s interference with the referendum process at the beginning of the month, there is not in fact a formal trading agreement between the USA and the EU. Such an agreement is in the course of negotiation but trade between these two blocs has been happily conducted for many years under the aegis of the World Trade Organisation (which exists to support free trade globally). Obama’s comments were simply politically motivated, lazy and self-interested.

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.

In its blatant attempt to construct a spurious financial case to support the ‘remain’ campaign the Treasury’s disingenuous pamphlet revealed the Government’s prediction of the number of immigrants expected to arrive in the UK by 2030. According to Osborne’s own forecast contained in that brochure this figure was stated to be 3.3 million people (much higher than we have previously been led to believe). To put it another way, that represents an increase of 5% to the UK’s current population (even before taking into account the additional natural increase in numbers with births outnumbering deaths) over the next 14 years.

We can clearly see that the UK’s national facilities are already under severe pressure and stretched to breaking point. One shudders to think of the impact that such a quantum leap in population will have on the NHS, our education system, the UK’s transport structure, defence, law and order, housing facilities and food production. Perhaps it is not a surprise that the government prefers to deflect attention away from the eye-watering levels of increased taxation that would be required to support Britain’s infrastructure in the event of such an influx of people. Common sense and security demand the return of border controls.

Since the end of the Second World War Britain’s defence has been secured through our attachment to NATO. It has certainly not been enhanced through our connection to the EU. Leaving the EU has no bearing upon our continued affiliation to NATO.

On the domestic front, official figures published in April by the Office of National Statistics indicated that violent crime in the UK rose by 27% in 2015. Of the 43 police forces around the country, all recorded a rise and 41 of them showed a double-digit increase. This situation is unlikely to be improved if we see an uncontrolled increase in population.

Despite the scare-mongering and the level of deception masquerading as ‘facts’ emanating from the ‘remain’ campaign, the latest opinion polls suggest that the ‘remain’ side stands at just 43% of the vote, the ‘leave’ group at 40% and the ‘undecideds’ at 17%.

Forty years of experience have shown us that the EU is intrinsically undemocratic, financially incontinent and completely unwilling to change. Leaving the EU would no doubt cause some short-term economic turbulence but the issues set out above make the case for Britain to leave the EU ever more compelling.

Winston Churchill has been deliberately misquoted in the course of this campaign in the hope of supporting the ‘remain’ case. What he actually said was “We are with Europe but not of it. If Britain must choose between Europe and the open sea, she must always choose the open sea”.

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