Quotidian Investments Monthly Commentary – July 2016
A month on from the Brexit vote and there is growing evidence that the pre-referendum warnings of catastrophic consequences in the event of a decision to leave the EU were, to say the least, overdone. Deception masquerading as ‘facts’ was the hallmark of the ‘remain’ campaign as can now be clearly seen.
There are welcoming signs of future trade agreements with, among others, China, India, the USA and Australia and the predicted stampede of companies leaving the UK has not materialised.
In the immediate future, though, the first bridge to cross has to be an equitable exit from the EU.
As we will all be aware, the first step in that process is to invoke Article 50 of the Treaty of Lisbon and the UK controls the timing of that in entirety. Whilst the EU might wish to rush things (in order, of course, to avoid any contagion of Brexit to other countries) it is entirely in the UK’s gift as to when that button should be pressed.
We are already in the EEA (European Economic Area) which is where (once outside the EU) we must choose to remain. This, together with an application to join the European Free Trade Area (EFTA) will give the UK an immediate solution to the ‘access to the single market’ trading problem.
More importantly, under Article 112 of the EEA Agreement, the UK also has the unilateral right to claim a partial opt-out from the EU’s ‘freedom of movement’ rules. This would allow us to set up a quota system to control immigration from other EU countries.
The EU will no doubt seek to encourage us into going along with their much-touted plans for a ‘two-tier’ Europe which would leave the present Eurozone countries united and centralized and with the UK and other non-euro nations sitting on the side-lines (where we would possibly be joined by so-called ‘neighbouring’ countries such as Turkey and Morocco).
This will no doubt be portrayed by the EU as a very attractive compromise whereas it would, in fact, be a highly deceptive and damaging strategy for the UK. It would still leave us as a part of the ‘supranational’ EU system but as a second-class member and still with all the disadvantages that we voted to extract ourselves from.
EU rules dictate that negotiations for exit must be completed within two years of triggering Article 50. The most disastrous option is that we could reach the end of our two-year negotiation period without any agreement having been reached. Bearing in mind that the EU has already taken 10 years to negotiate a trade deal with the USA and still there is no agreement in sight. Likewise, negotiations with India were abandoned after nine years of pointless wrangling and the inability by the EU end of things to make a decision. The impossibility of 28 countries reaching accord is palpably obvious when one looks at the pigs-breakfast they have made of trade negotiations thus far.
On invoking Article 50, therefore, the UK should immediately apply for an extension to the 2 year negotiating period (as the rules quite legitimately allow us to do) in order to avoid the absurd situation where, after leaving the EU but in the event of having failed to reach an acceptable exit agreement within 2 years, the remaining EU counties could still sell to us but we would no longer have the necessary paperwork to sell to them!
We must hope that our negotiators are capable and well-informed enough to negotiate the labyrinth and the sophistry of their EU counterparts.
On 31st July the FTSE 100 closed at 6724.43 (a rise of +3.38% for the month of July and +7.72% for the 2016 year to date). The main UK index has already surpassed its pre-Brexit level. By comparison, the Quotidian Fund’s valuation at the same date shows an uplift for the month of July of +15.39%and for the year to date the Fund is now – 9.71%.
As was predicted in last month’s report, the immediate post-Brexit equity market markdown was synthetic, transient and based purely on panic and fantasy. Nothing could better illustrate the artificiality (one could even say cynical) nature of that negative adjustment to equity prices than the speed of our recovery. Substantial ground was regained by the Fund over the month and we remain confident of continuing positive momentum into profit before the year-end. That sanguine assertion is supported by the following technical analysis:
For the past twelve months equity markets have been stuck in a frustrating trading range which has continued to test the patience of investment managers and investors alike with not just one but three sharp stock market downturns of 12% or more over that period. Frustrating though they are, it is these downturns that eventually pave the way for the next bull run higher.
Taking the S&P 500 index as an example, history shows that whenever stocks take “a long pause” between 52-week highs and then finally manage to break out to the upside, they go on to post even further gains over the following 12 months (according to research from Merrill Lynch for which I am obliged). The Merrill Lynch data shows that whenever stocks have gone for more than 300 calendar days before making a new 52-week high then, 91% of the time, the S&P 500 continues to go up over the next 12 month period. That is rather an encouraging precedent.
The S&P 500 Index last attained a new 52-week high in May 2015 but in recent weeks it began to close in on that highpoint once again and then actually reached a new all-time high at a level of 2175 on 22ndJuly. Such a bullish signal has only occurred 23 times since 1929, and in the succeeding 12 months it has produced above-average gains for equities 9 out of 10 times in the past.
Rather than yet another correction downwards as so many relentlessly negative ‘experts’ are keen to predict, the historical analysis above suggests that this index will rally further to even higher highs over the coming year. And where the US market leads, global markets follow.