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Quotidian Investments Monthly Commentary – March 2020

April 5, 2020

At the risk of stating the blindingly obvious, from economic, fiscal and investment viewpoints the month of March was entirely overshadowed by the Covid-19 crisis. As we become more familiar with the vicious and cruel effects of this virus itself so we become more certain that it will be the predominant factor to affect global financial markets for at least the next five years, if not longer.

The knock-on effects of expansive monetary policies and rigorous social restrictions introduced by governments around the world to counter the unwelcome impact of this coronavirus on the global economy (inter alia, rampant unemployment with its associated financial woes, threats to corporate solvency and to personal freedom together with unwelcome future inflation) will be far reaching and long-lived.

Whilst we are naturally pleased that we were in a position to anticipate the recent significant stock-market crash and move into the relative safety of cash as this coronavirus spread far and wide, the depth of the decline in equity valuations was still surprising and reflected the extreme difficulty that market-makers faced in attempting to price in the risk relating to the time it will take to bring the virus under control and thus limit the economic damage it will create in the meantime.

Exceptional day by day (and, indeed, intraday) volatility was breath-taking. It became a regular feature to see equity indexes move up or down by 10% or more on alternate days and intraday swings in the range of 5% up to 5% down were commonplace too. Volatility at that level is simply untradeable (both on the buy and the sell side) and when pricing mechanisms start to trigger investor’s stop loss positions with that degree of frequency and depth then equities start to cascade down upon themselves of their own volition and price action becomes dysfunctional.

On 31st March 2020 the FTSE100 index closed the month at 5671.96, a fall of -13.81% in the month of March and it now stands at -24.80% for the 2020 calendar year to date. By comparison the Quotidian Fund’s valuation at the 31st March shows an uplift of 1.91% for the month of March itself and the Fund is up 7.31% for the 2020 year thus far.

It was rather flattering to read a comment in one of the better financial journals that “only a handful of investment managers could have fathomed this scenario for global markets” but, having sought the relative safety of cash on 7th February and thus saved ourselves from the circa 35% fall in equity valuations that ensued, we were and still are far from complacent as we fully recognised that we now had the even bigger challenge of identifying an opportune moment to begin the process of re-entering equity markets and creating worthwhile profits again. As stated in last month’s report, it was clear that there would certainly be a huge buying opportunity once all the emotional noise dampened down, the Chinese smoke and mirrors cleared away and Covid-19 was seen to be under control.

As governments the world over sought to stem the rising infection rate and the ever-increasing death toll in its wake, the potential economic catastrophe was becoming more apparent and their initial fiscal response was to make substantial cuts in sovereign interest rates. In the UK, for example, our rate of interest was cut to a record low of 0.10%. Considering that the UK’s average rate of interest in the period 1971 to 2020 has been 7.40%, today’s figure is incredible and fully reflects the fear of the profound economic damage that could flow if this pandemic is not brought swiftly and surely under control.

On the last day of February’s trading the US Federal Reserve had announced that it would “use all the tools available to us” to support the economy and on 15th March they were true to their word. Not only did they cut interest rates to the bone but they also injected a new round of financial stimulus by way of quantitative easing.

To ensure that the central message (that it would make sure that banks had enough liquidity to help businesses survive the impact of the coronavirus pandemic) was clearly understood, the Fed stated that it would buy $500 billion in US Treasury Bonds and $200 billion in mortgage-backed securities over the next few months in an overall financial rescue package worth 2 trillion dollars. Governments around the world have been emboldened to follow the US lead with their own stimulus programmes.

It is interesting to write that $2 trillion figure down in order to appreciate the number of zeros involved and thus the size and significance of the number. However, it is even more instructive to consider that if you were to pay one dollar every second then you will have paid a million in about 12 days, a billion would take around 32 years and just one trillion would take roughly 31,710 years. Some stimulus!

Having seen the same tactics employed to support the global economy’s recovery from the financial crisis of 2007-2010, we can now see, in broad terms, how this is likely to play out. In the short-term it will inflate asset values once again (although that will not simply be an easy glide to sunny uplands; undoubtedly there will be a number of bumps in that road) but in the longer term it simply kicks any underlying problems further down the road.

Just to expand briefly and in simplistic terms here upon our method of investment decision-making: Using a proprietary amalgam of fundamental and technical analysis we study the financial information contained in a target company’s accounts and its quarterly reports to make a judgement as to whether the figures and commentary therein suggest any potential problems (and, if so, whether those issues relate to short-term liquidity matters or long-term solvency concerns). We then turn our attention to the organisation’s Earnings per Share and its ability to maintain an attractive EPS level into the future. In the current economic climate it is even more essential to focus on whether its core revenue flows will remain robust and strong enough to see it through the Covid-19 emergency.

Our in-house and privately-operated system of technical analysis then comes to the fore in order to determine the most opportune price points and timing for entry or exit to its shares.

By 20th March, our exclusive analysis was showing us positive signals and so we began to buy back in to equities. I hasten to add that our self-developed analysis systems have consistently produced successful results over the past 30-odd years and we are entirely comfortable with their efficacy (but they are not infallible when markets are so fragile, volatile and easily spooked). To begin with, we therefore dipped our toes back into the market and will continue to rebuild our portfolio in sympathy with ongoing market conditions and in harmony with the risk environment becoming more balanced, equitable and positive.

As at the end of March we are currently 40% reinvested in equities and, so far, the markets we are invested in have been rising. Long may this return to a more positive attitude in equity markets continue.

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