Quotidian Investments Monthly Commentary – October 2017
Over the past few years the EU has made a nasty and repetitive habit of trying to impose random fines on major US tech companies either under the guise of them having received ‘illegal state aid’ or, seemingly, simply for being too successful. Perhaps this reflects a belated underlying recognition that the EU’s revenue generators are overwhelmed by the EU’s revenue consumers.
This year alone Google, Apple and Amazon have been in the firing line to suffer these arbitrary haircuts.
In June the EU fined Google 2.4 billion euros for ‘unfairly dominating the search and advertising market’. At the end of August it also fined Apple 13 billion euros (a figure apparently plucked from thin air) in respect of ‘unpaid taxes’ after the EU argued that Ireland had apparently granted ‘illegal state aid’ to Apple by virtue of a favourable tax regime.
In this instance the EU employed the sly device of instructing Ireland to collect the penalty fine. By the end of October and in the absence of any settlement, the EU announced that it is now taking the Irish Government to court in order to extract the uncollected fine! All one happy family!
Earlier this month Amazon became the latest target of the EU’s gaping fiscal maw. The European Union is asserting that Amazon used Luxembourg as a tax haven and that it had received ‘illegal state aid’ by virtue of a ‘sweetheart’ deal with that country for the period between 2003 to 2011. A fine of 250 million euros (another conjuring trick) has been imposed.
It is interesting to note that the Prime Minister of Luxembourg from 1995 to 2013 was none other than Jean-Claude Juncker! Indeed, the slippery Monsieur Juncker was simultaneously Luxembourg’s Minister of Finance between 1989 and 2009. It would therefore be beyond parody to suggest that he would have been entirely unaware of these now so-called illegal arrangements. At the height of the original Greek bail-out crisis Juncker was quoted as saying that “when things become serious you have to lie”. No wonder that Brexit negotiations are moving ever so slowly!
The active ingredient and common thread in these tawdry attempts to fill the EU’s coffers is EU Commissioner Margrethe Vestager whose approach is typical of the totalitarian, anti-business bully-boy tactics so often employed by our continental friends. They clearly see businesses as bottomless pits of finance to be endlessly milked in order to cover the EU’s gross overspending.
However, in taking on the US tech giants the EU has bitten off more than it will be able to chew and its vain, naïve attempts to extract fines on trumped up charges is highly likely to backfire. In mid-October the US Senate finally gave the green light to Donald Trump’s long awaited new tax plans. These will benefit individual US taxpayers but, in particular, they are framed in such a way as to encourage US multi-national companies to repatriate their profits to the USA where they will now face a much-reduced corporation tax burden. One day the EU will perhaps begin to understand the shortcomings inherent in their dictatorial, autocratic socialist paradise compared to the benefits of international consumer choice. They might be surprised to discover that the customer (or, in this case the taxpayer, whether individual or corporate) can vote with his feet. The consequential loss of long-term business revenues and loss of consumer spending in EU markets far outweighs the blinkered short-term ‘fix’ of synthetic, concocted fines.
Following the unwinding of Quantitative Easing announced in the US in September the European Central Bank followed suit, to a degree, in October. With effect from January 2018 the EU will reduce its QE commitments from 60bn euros down to 30bn euros per month. However, the EU’s QE programme has now been extended to September 2018 with the additional promise that it will be further extended forward again if necessary. Mario Draghi is clearly still intent on ‘doing whatever it takes’ to paper over the EU’s financial cracks but the problem with playing the extend-and-pretend game with finances is that eventually the music comes to a grinding halt.
On 31st October 2017 the FTSE100 closed at 7493(a rise of+1.63% for the month) and it now stands at +4.90% for the 2017 calendar year to date. By comparison the Quotidian Fund’s valuation at the same date shows a rise of +0.35%for the month of October and the Fund is now up+32.10for the 2017 year to date.
To quote Warren Buffett, “interest rates have always been a powerful factor in equity valuations”. The yield on US Treasuries today is just 2.39% and so prospective buyers are faced with the deeply unattractive prospect of exchanging their capital in return for a 2,39% annual income and the return of their original capital in ten years’ time (with no prospect of growth in either the coupon payment or the capital). Return free risk still persists in the bond market.
By contrast, the dividend yield on the S&P500 is roughly 2% and on top of that investors have the prospect of growth in the dividend return as well as capital appreciation. Of course there is always the risk of a downturn in equity valuations but if one has a well-chosen portfolio and is prepared to hold on through the occasional stockmarket storm, capital values will inevitably recover. Perseverance, confidence, timing and patience are some of the necessary attributes in achieving the right long-term result.
However, to introduce a more negative note just to balance the argument with historical data; using the S&P500 as a realistic proxy for global equity markets, momentum continues to be modestly positive although investor confidence is somewhat less so. As I write, the S&P500 has now gone for 363 trading days without at least a 5% downward correction. In the past 65 years there have only ever been three longer periods without a significant negative readjustment. During 1964/65 equity markets went for 386 trading days without at least a 5% decline; between 1993/94 it was 370 days and between 1995/96 it was 394. The current situation is therefore perilously close to creating a new record. It may well be that the continuing flow of flight capital into the USA stockmarkets (as referenced in our September report) is the proximate cause of this but by the very nature of equity markets they inherently require a correction to remove ‘froth’ before re-gathering upward motion.
Our aim is to invest with an acute awareness of the risks (economic and political) around us on a daily basis. In doing so, we seek to protect our portfolio as best we can during the inevitable periods of market declines. Having taken shelter away from equity markets since July we would actually be much in the same place valuation-wise today as if we had remained exposed to market risk. As outlined above, there are some compelling reasons to recreate our equity portfolio but the continuing risks posed by experimental monetary policy and heightened geo-political tensions (North Korea and Catalonia in particular) still persuade us to bide our time for the moment.