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Quotidian Investments Monthly Commentary – May 2018

June 10, 2018

Only three of the established equity markets around the world are currently in positive territory for the 2018 year to date and even those three are just marginally above the waterline.  Markets have been subdued by a series of political issues whose economic significance has been either invented, misinterpreted or blown out of all proportion.

A great deal of hot air has been expended in respect of a putative trade war between China and the USA.  This has been one of the main excuses put forward for lacklustre and volatile equity markets in the first five months of this year.

However, as a guide for the perplexed, one only has to recall Trump’s mantra on the day of his inauguration that his aim was to put ‘America first’.

It has become increasingly clear that trade deals entered into by Trump’s predesessors have been commercially inept from the US viewpoint and those deals agreed in respect of nuclear disarmament and climate change have, at best, been naïve and, at worst, simply reckless.

Those who seek to deride President Trump or diminish his methods and achievements find it all too easy to target his appearance and his negotiation techniques but, in their eagerness to find fault and project him as a figure of fun, they tend to overlook or underestimate his successes.  

The current imbalance of trade between China and the US runs to a not insignificant $375 billion in China’s favour.  A knock-on effect of that has been to diminish America’s manufacturing industry and marginalise those who were once employed in that sector.

In April, China’s huge telecoms business (ZTE) was proved to be guilty of breaching US trading sanctions against Iran and North Korea and, as a result, it was banned from dealing with any US companies.  ZTE provides employment for  70,000 people in China and from mid-April until now this veto has already cost ZTE an estimated $3 billion in lost revenue.  Clearly, an extended period of prohibition would create unwelcome economic and social problems for ZTE and the Chinese government (which is its majority shareholder).

Trump has described the Chinese leader (President Xi) as ‘a world class poker player’ and in direct negotiations this month between Trump and Xi it has been agreed that ZTE will accept a fine of $1.3 billion plus a guarantee to buy US components to the tune of $200 billion.  The conciliatory tone adopted by both leaders suggests they fully recognise that a trade war would be detrimental to both countries and it would seem that this risk (if indeed it was ever a real risk rather than a negotiation stance) has receeded.  Trump, despite his many critics, has ensured that ZTE will stay in business whilst simultaneously eroding substantially, in the short term, the present China/US trade imbalance.  In so doing, he has shown himself to be an equally gifted poker player!

On 31st May 2018 the FTSE100 closed the month at 7678.20, a rise of +2.25% in May and it now stands at -0.12% for the 2018 calendar year to date.  By comparison the Quotidian Fund’s valuation at the same date shows a profit of +4.68% for the month of May and the Fund is now standing at +4.67% for the 2018 year to date. 

As I was putting the finishing touches to the narrative of this report on the penultimate day of May a further news story broke in relation to the ongoing trade talks between China and the US.  These talks are set to resume on 2ndJune and, in what we currently perceive to be a simple device intended to concentrate minds, Trump has again raised the threat of imposing tariffs on Chinese imports to the USA.

The fact that any detail of these tariffs will not be announced until mid-June and only potentially then come into force at the end of June does rather suggest that this is no more than an unsubtle basis for negotiation on the future trading relationship and ongoing balance of trade between the two largest economies in the world.

Turning now to Europe.  In a shameless attempt to overturn the result of the recent election in Italy and so subvert the will of the majority of Italians, the EU has pressurised the current Italian President (a position not noted for its longevity) into refusing the right of the victorious parties to form an anti-EU government. 

This deliberate denial of democracy may eventually come back to bite them.  However, given the EU project’s long historical record of escaping from the tightest of corners we would not discount its ability to manufacture a method of circumventing the burgeoning Italian financial crisis. 

In a typical show of arrogance and complacency from an unelected technocrat, the European Commissioner for Budget and Human Resources (Gunther Oettinger) was quoted as saying that “the markets will teach the Italians to vote for the right thing”.  Oethinger obviously remembers (as do we) that, in 2011, the EU toppled Berlusconi’s elected Italian government by manipulating bond spreads to exert maximum financial pressure on Italy.  It will no doubt use the same tactics again but Italy is a bigger nut to crack than Greece was and have more cards to play with.

Sadly, the EU continues its preferred response to any challenge by refusing to listen to alternative points of view and simply seeking to bury its head in the sand.   If it persists with that inherently anti-democratic approach then it may well discover that burying one’s head in the sand inevitably leaves another part of the anatomy fully exposed. 

More seriously, the EU’s unwillingness to adapt to a rapidly changing world could very easily lead to catastrophe (not just in Italy but throughout Europe) from political, economic and monetary points of view.  We are attuned to further developments and will aim to position the Fund’s assets accordingly.

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