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Quotidian Investments Monthly Commentary – December 2020

January 2, 2021

As 2020 has thankfully reached its demise it seems appropriate to begin our ‘end of term’ report by briefly reviewing the now-familiar factors that have affected the world of investment throughout the past year and, at the same time, consider the likelihood of these same issues flowing over into 2021.

The global pandemic has, of course, been the most dominant and persistent issue to blight 2020 both from an humanitarian perspective as well as an investment viewpoint.

Brexit and the tediously repetitive process of negotiating its completion has been a constant headwind for the UK stockmarkets and, indeed, European bourses too. Of course we learned very quickly that what the EU says very rarely accords with what it means.

A process that supposedly began under the terms of the ancient and quaintly romantic southern European phrase uberrima fides mutated behind closed doors (and was even further disguised behind a seemingly bland French façade) into the pragmatic reality of the rather more harsh northern European slogan of Deutschland uber alles.

I recall a quotation from Alan Greenspan (who was well known for speaking in riddles as chairman of the US Federal Reserve under the Presidency of Bill Clinton). Following a particularly opaque speech intended to ‘clarify’ the Fed’s then current interest rate policy he once said that “if you think you understand what I’m saying then I’m not making myself clear.” He would certainly have made an ideal president for the European Union.

The US Presidential Election was the third and most significant issue to affect investment markets during 2020 and, even now, its longer-term impact is still in the balance.

On 31st December 2020 the FTSE100 index closed the month at 6,460.50 (a rise of +3.10% in the month of December) and it stands at -14.34% for the 2020 calendar year to as a whole. The over-optimism apparent in the first week of November has now given way to a more considered realism.

By comparison the Quotidian Fund’s valuation at the 31st December shows an uplift of +0.38% for the month and the Fund is now up +33.56% for the 2020 year in its entirety; (47.90% ahead of the FTSE100 index and light years ahead of inflation and the yields available from gilts or on typical building society returns).

Whilst the bare bones of these performance figures are pleasing, the most satisfying aspect from our point of view is that we achieved a positive return in each and every month of the year. Given the inherent volatility of equity markets (and the particular challenges posed during 2020) that ideal is much easier said than done and it is an achievement that we are most proud of. It validates our investment philosophy and reaffirms our confidence in our proprietary investment processes.

For the immediate future equity markets will still remain in thrall to Covid, Brexit and the result of November’s US Presidential election but there is now at least a glimmer of light at the end of a very long series of tunnels.

As a result of the extraordinary research work performed, inter alia, by Pfizer, Regeneron, Oxford/Astra Zeneca and Moderna there are now four vaccines in production that will combat the effects of this dreadful virus. Whilst that is clearly cheerful news, it must be said that one should remain sanguine but realistic in one’s judgement of a long-term cure. The virus has already shown its ability to mutate and its latest iteration shows that it has the power to spread infection more quickly and more widely.

Whilst vaccination programmes are underway and will hopefully be completed throughout the UK by the late summer of 2021, we simply do not yet have sufficient data or feedback in respect of the long-term efficacy of these vaccines. We are still uninformed as to whether these injections will require an annual (or shorter) boost much like the existing flu vaccine does or whether it’s a once-(or twice)-and-done-forever medication. Until that position becomes clearer it would be wise to keep the sound of trumpets muted.

We have been supporters of Brexit since the 2016 referendum and, as has been consistently stated in our monthly reports, we have been confident that a last-minute deal (as always with the EU) would be reached. Whilst the ‘short synopsis’ (all 1234 pages of it) is littered with legalese and potential double-meanings, the main thing of real consequence is that the UK has now extricated itself and is free from the self-serving and biased judgements of the European Court of Injustice. That alone is a position to celebrate.

Boris’s deal also takes the UK out of the much vaunted (but UK-disadvantageous) single market. This is also a blessing in that it removes the UK from the shackles of EU protectionism and over-regulation. The godsend here is that the UK still has access (for what it’s worth) to the EU’s single market but is now allowed (for the first time since our mistaken entanglement with this communist inspired group of banditti began) to independently arrange more advantageous trade deals of our own around the world.

Twenty years ago just over 60% of the UK’s trade was with the EU. Today, our trade with the EU represents just less than 40% of the UK’s total and that figure continues to fall. Worse still, our trade imbalance with the EU runs at an annual deficit of circa £100 billion. Good business? In contrast, the UK has a trade surplus of £49 billion with non-EU countries.

With typical bravado (whilst ignoring any inconvenient facts) the EU has constantly promoted itself and its single market as the biggest trade bloc in the world. If only that were true! Yes, indeed, the EU has free trade deals (FTD’s) with roughly 70 countries but, in the main (once one looks beyond Germany, France, Italy and Spain), these are relatively small states In its blind self-regard the EU actually makes Arthur Daley appear to be a pillar of probity.

Its own website confirms that “The single market is at the heart of the European project, but its benefits do not always materialise because single market rules are not known or implemented, or they are undermined by other barriers” and goes on to say that “The EU Single Market accounts for 450 million consumers and 22.5 million small and medium-sized enterprises (SME’s)”.

The United Kingdom has already made or grand-fathered free trade deals with 60 of the pre-existing 70 EU arrangements and new FTD’s have already been agreed with Japan, Canada and Mexico. Talks are ongoing with the USA, Australia and New Zealand and these will no doubt come to fruition now that Brexit has finally completed.

Despite its hubris there are a number of other trading blocs around the world which outweigh the EU’s single market. These include: the Asia Pacific Economic Cooperation, the North America Free Trade Agreement, the South Asian Association for Regional Cooperation, Mercosur (Brazil, Argentina, Uruguay, Paraguay and Venezuela), the Pacific Alliance, the Association of Southeast Asian Nations, the Regional Comprehensive Economic Partnership (15 countries comprising 30% of global GDP….and growing) and the soon to be established African Continental Free Trade Area (comprising a population of 1.2 billion people). Brexit freedom will allow the UK to explore potential links with all of these.

However, the most attractive new free trade markets for British products will likely be found in the British Commonwealth which comprises 54 countries (totalling 2.46 billion people) all of whom are members of the Commonwealth by voluntary choice not by diktat. They share a common language, a common legal system and a common ethos (and above all, they want to trade with what many of them still regard fondly as the “mother country”).

As for standardisation and level playing fields, the EU’s website explains very explicitly that “Standards are voluntary technical specifications” although I don’t recall there being any mention of charitable, self-selection or personal choice arrangements being available during the Brexit negotiations. We are well out of this farrago of self-interest and centralised control whose motto should be “all for one (Germany) and one for one too”. Let me assure you that this is a comment based purely on economics and finance, not on any other grounds.

Only 5% of British companies export to the EU yet, despite that, every British company has to comply with costly EU rules, restrictions and bureaucracy. The UK will be well rid of all that meaningless, burdensome and non-productive red tape.

It is also worth noting that EU protectionism and over-regulation suppresses its ability and its opportunities to increase product development and trade in new areas such as Artificial Intelligence and Biotechnology (witness the extended delay in introducing Covid vaccines within the EU).

Finally, the after-effects of last November’s US Presidential election are still rumbling on and will have an impact on future US legislation, taxation and trade. The final result was much, much closer than generally expected (with Donald Trump still trying to overturn the outcome). If, in spite of all the ongoing shenanigans, Biden is eventually appointed then his ability to pass any meaningful legislation will depend on whether the Democratic Party wins control of the Senate. This will be clarified on 5th/6th January when a re-run of two seats in Georgia will determine whether this State (and therefore the Senate) will remain in Republican hands or move to Democratic governance.

If the former then Biden will struggle to pass any of his left-wing agenda into law; if the latter, then we are likely to see a return to the Obama days of feeble, economically and financially incontinent negotiations combined with a preference for appeasement when dealing with the likes of Iran and China (both of whom are increasingly aggressive towards Western capitalist interests). These countries (and a handful of others) see appeasement as a sign of weakness to be exploited and so an unfettered Biden will make the world a less stable and more dangerous place.

We were further reassured (and I say this with a large degree of humility rather than hubris) that our decision-making systems remain robust and fit for purpose by the fact that Quotidian has won a series of industry awards for its 2020 investment performance: At the recent HFM EuroHedge Emerging Managers Awards ceremony 2020 the Quotidian Fund was presented with both the Multi-Strategy Award and also with the Global Equity Fund (Under $100m) Award. Naturally we are grateful for that recognition from our peer group.

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