Inflation remained the key focus for equity markets throughout July. Central Banks continued to act to counter inflation and inflationary expectations, with the ECB raising rates for the first time in 11 years, the Fed moving rates up and, at the start of August, the MPC following suit with a 50bp rate increase. Whilst there are signs that core inflation is starting to ease, the unknown remains energy and food prices, both heavily linked to the conflict in Ukraine.
From a corporate perspective, broadly positive earnings updates led to better performance from equity markets as a whole. Across the portfolio, supply chains remain a challenge, with heightened inventory levels common as companies focus on securing the necessary materials to meet customer demand. Order books, consumer facing stocks aside, remain robust, and whilst cost inflation remains a challenge, we are seeing good progress in passing costs on in the form of increased prices across the majority of the portfolio.
From a fund perspective, our poorest performers were all linked to the outlook for consumer spending. CMO, the online-only retailer of building materials, adopted a more cautious near-term outlook, whilst Wickes saw softer trading in DIY and a slowing of new orders in their “Do it for me” segment. Revolution Beauty also downgraded forecasts, on destocking by US retailers and a loss of sales into Russia and Ukraine. Alongside consumer facing difficulties, one theme we have seen is poor performance from a number of the Fund’s conceptual and nursery stocks (some of which IPOed in 2021) with these less proven business models proving vulnerable to more difficult economic conditions. This has reinforced our strategy of continuing our rotation towards favoured growth stocks which are now available for more attractive valuations and which we believe should position the fund well going forwards.
From a positive perspective, Kistos performed well on strong European gas prices and the announcement of a bid for Serica Energy. Also strong were Spirent and Big Technologies despite no newsflow. Additionally, GB Group and Sigmaroc both rallied on the back of positive trading statements.
On the trading front, we trimmed several holdings (Qinetiq, Kistos, Man Group) into strength and realised some liquidity from the Fund’s two ongoing bid situations, Euromoney and Homeserve. Additionally, we exited our holdings in Zoo Digital and Xaar on valuation grounds. On the buy side, we added to our Globaldata holding on weakness, and selectively topped up a number of stocks on weakness (notably Genuit, Essentra and Synthomer).