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Quotidian Investments Monthly Commentary – November 2020

December 3, 2020

Simply on the basis of a handful of optimistic forecasts relating to effective Covid-19 vaccines becoming readily available on the near horizon, the first week of November saw substantial uplifts in global equity market valuations. The FTSE100 rose by 14% in that week alone (as if all the UK’s economic problems had been magically solved). In line with the age-old cliché of London buses, you wait for ten months with no sign of one and then four arrive together (Pfizer, Regeneron, Oxford/Astra Zeneca and Moderna) but we don’t know that they’ve yet passed their MOT’s.

Naturally we all hope that this is indeed the case but to cram what would normally have been 10 years’ worth of research and development into a ten-month period and then produce and distribute an efficacious vaccine in global quantities does require suspension of disbelief on a heroic scale. At this stage it seems more akin to the triumph of hope over medical reality and appears to be based more on the wish being the master of the thought.

The fragility of this so-called recovery can best be illustrated by looking more closely at the daily volatility of a few well-known shares (which, in turn, are a proxy for many others). On the 9th November alone:

Activision Blizzard’s shares opened down 10%, recovered to minus 0.50% and then closed down 4%.

Amazon opened down 6%, recovered to minus 1% and then fell back to minus 5% at close.

Electronic Arts opened down 7%, climbed to +1.6% and fell again to close at minus 2%.

Take Two opened at minus 10%, recovered to minus 5.6% and fell back to close at minus 9%.

Netflix opened at minus 9% climbed up to minus 4% and fell again to minus 8%

All this in intra-day trading on that one day alone and symptomatic of market activity around the globe. This has more of a relationship to gambling as opposed to investment.

Many of the airline stocks, together with those in the travel and hospitality sectors also saw substantial single-day pricing upgrades (+30% to +40% was not uncommon during this short period of over-enthusiasm). Since 11th November, though, prices have reverted to being sideways to negative as over-optimism has waned.

Of course, we recognise that equity markets are forward-looking and they price-in positive signals for the future but it may well be that some more alert investors (particularly those of a certain age) may have picked-up on a possible connection between Pfizer (whose other main product is Viagra) and its Covid vaccine and are hoping that the vaccine might introduce some rigidity into what have otherwise been limp 2020 global equity markets.

A more pragmatic note from Morgan Stanley (not noted for an Alice in Wonderland outlook) in the last week of this month strongly suggests another 10% correction before a substantial rebound in 2021.

On 30th November 2020 the FTSE100 index closed the month at 6,266.20 (a rise of +12.35% in the month of November) and it now stands at down -16.92% for the 2020 calendar year to date. The over-optimism apparent in the first week of November has given way to a more considered realism.

By comparison the Quotidian Fund’s valuation at the 30th November shows an uplift of +0.42% for the month and the Fund is now up +33.05% for the 2020 year thus far. (49.95% ahead of the FTSE100 index and light years ahead of the yields available from Gilts and on typical building society returns).

Throughout the interminable Brexit negotiations the EU has continued to lecture our representatives on the vital importance of a level playing field and of the EU having the final legal say in what constitutes this vision of economic paradise. As recently as mid-November Mrs Von der Leyen announced that Brussels needs enforceable guarantees of fair competition in areas such as subsidy law, taxation, environment and labour (employment) laws. She also demanded a long-term deal on fishing rights and a robust enforcement system (by which she means the laughably mis-named Orwellian construct known as the European Court of Justice).to oversee the deal. In other words, even at this late stage the EU is intent on keeping the UK firmly under its thumb.

By strange coincidence, the EU also announced a number of financial handouts this month to various companies based in different parts of its realm:

An extra 6 billion euros was given to Air France/KLM (on top of the 10.4 billion given earlier this year). We were assured at that time that it was a ‘one-and-done’ arrangement.

A substantial rescue package presented in the form of a huge tax-break to the Tuscan bank Monte dei Paschi (the largest lender in Italy); it is not yet clear whether the bank will be required to amend its name to Monte dei Pesce as this tax device sounds rather fishy.

Air Italia has also been recapitalised from EU funds.

In Germany, Thyssen Krupp has been given 5 billion euros, Tui has received 1.2 billion euros and Lufthansa has benefitted to the tune of 9 billion euros.

Spain has received 10 billion euros to support various parts of its economy via Cassa Depositi e Prestiti, its state-owned sovereign wealth fund. Euronext (its stock exchange operator) and Nevi (a payments business) have been among those to have already benefitted.

On top of all these individual beneficiaries sits the recently agreed EU ‘recovery fund’ which comprises 750 billion euros to be used for assistance when and where required.

The good news is that, naturally, none of this is deemed to represent state aid (which would of course, be illegal under EU legislation) and the EU would never break their own immutable laws would it.

There does, though, appear to be rather a conflict of interests between the EU’s rhetoric (and the rules they wish to impose on its future dealings with the UK) and the ‘rules’ of their own making which they ignore at will when it suits their own purposes. Under the unblinking eye of the European Court of Justice, blatant breaches of its own firm and unyielding rules is de rigeur and therefore deemed to be perfectly allowable.

I should confess that English is my second language and I sometimes get confused by its nuances; as a result I may perhaps have become perplexed by what the EU is up to (although somehow I doubt it). Fair competition and a level playing field? Baloney. There are none so blind than those who don’t want to see (or to be seen to be acting with the subterfuge that is second nature to and standard practice in the EU).

Despite these financial interventions the Eurozone remains in deep economic contraction and, until its component parts would ever agree to debt mutualisation (which Germany never will) then it will lurch from one financial disaster to the next whilst printing money to cover its manifest failings (and its tracks).

Finally, a little word about the UK economy and its current problems and future issues.

In the past month it has been broadcast that the UK’s national debt has now risen to £2 trillion (unsurprisingly its highest ever level). Partly that is a function of the financial measures taken thus far to control the economic effects of Covid and partly the consequence of uneconomic but politically motivated vanity projects such as HS2, Crossrail and the Northern Powerhouse.

The real issue I am trying to highlight here is the ongoing cost of just servicing this current eye-watering level of debt let alone the very probable additional debts that are likely to accrue until the coronavirus pandemic is properly under control.

Last week the Office of Budget Responsibility (yet another wonderfully evocative name that, in the real world, usually means the opposite of what it says) let the cat momentarily out of the bag by telling us that every percentage point rise in short-term interest rates will have a dramatic effect on the size of the deficit; increasing it by £6 billion to £12 billion (which represents 0.50% of the UK’s GDP); the effect of compound interest and geometrical progression are not friendly travelling companions when debt has been allowed to rise to such unsustainable levels.

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