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Quotidian Investments Monthly Commentary – December 2019

January 4, 2020

2019 has been an exceptionally successful year for the Quotidian Fund albeit that it was, in parts, a challenge to all aspects of the skills of investment management In the course of the year there has been one market correction (a decline of circa 10% in July/August) together with an extended period of market doldrums (July through to the end of September) and these have tested our confidence in our asset selection abilities, our patience, our nerve and our resolve.

Having had these put to the test during 2019’s periods of adversity is no bad thing as it has been an opportunity to revisit and reaffirm our methodology and avoid complacency. Obviously we are not infallible nor are we immune from typical stock-market gyrations but the result of being assessed has confirmed our confidence that our management systems and asset selection processes are robust and fit for purpose.

One of the most important qualities for producing successful long-term investment returns is the ability to control one’s emotions during periods of stock-market turbulence. It is this, above all, that has steered us to this year’s remarkable performance.

On 31st December 2019 the FTSE100 index closed the month at 7542.44, a rise of +2.67% in the month of December and it now stands at +12.10% for the 2019 calendar year as a whole. By comparison, the Quotidian Fund’s valuation at the same date shows an uplift of +3.79% for the month of December and the Fund is up +33.41% for the 2019 year.

The main issues to have suppressed stock-markets over the past two years or so have been the putative trade war between China and the USA, the mainly artificial concerns pushed forward for political reasons about Brexit together with the lack of progress in its negotiations and the tightening of money supply (the imposition of higher than necessary interest rates) in the USA. As we look forward to the 2020 trading year these issues have all been recently resolved.

On 12th December the UK general election delivered a substantial majority for the Tory party and Boris Johnson took immediate action to complete Britain’s exit from the EU on 31st January 2020. Negotiations will then recommence with the aim of completing a free-trade deal with the EU by the end of 2020. With goodwill on both sides this should be eminently achievable despite the typically negative media commentary.

It is already clear that the UK is prepared to leave without a formal deal and trade under the auspices of the World Trade Organisation if the EU continues to be deliberately blinkered, self-serving and protectionist.

At Quotidian, we are entirely relaxed about the final outcome of Brexit and we take a positive view of the benefits to the UK economy of being able to trade globally and free of the over-regulation, political interference and petty protectionism that bedevils the EU approach to business and commerce.

We believe that the outcome of the UK general election will remove the inhibitions that have held back economic activity and investment in UK business and its economy generally for over 3 years now. As a consequence, we think that the UK stock market is demonstrably undervalued and, with the right political leadership together with business-minded and intelligent fiscal policies, the UK equity market will make up for three years of effectively going nowhere.

On 31st December President Trump announced that he would be signing the first stage of a trade deal with China on 15th January and the two sides would be meeting immediately afterwards to continue progress towards a wide-ranging and comprehensive agreement.

As 2019 progressed it became clear that the proximate cause of the global stock-market slump in the final quarter of 2018 was the US Federal Reserve’s policy in respect of tightening money supply, In the course of 2018 it had increased interest rates four times despite the obvious strength of the US economy. This strategic error was fully punished by equity markets (although that was not so clear at the time).

During 2019 the Federal Reserve effectively owned up to its erratic and erroneous interest rate policy by reducing rates four times in the course of the year. There are suggestions that further loosening will continue in 2020.

The three main issues that have held back equity market progress have, therefore, been addressed and we take an optimistic view of the prognosis for the coming year. We recognise that there will, of course, be periods of decline in stock-market pricing; we all understand that this is an inherent feature of equity investment. Each and every year sees global markets go through a correction which allows equities to wipe away any frothiness that may have built up in pricing, draw breath and then move higher again. There will, no doubt, be new challenges but we feel well equipped and well-motivated to deal with them as and when they arise.

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