Equity markets were under the cosh once again in September as investors took fright over the overtly hawkish approach of the Fed in tightening monetary policy to see off inflation. In the UK, investor anxiety was compounded by the mini-budget, which caught the market off-guard with large seemingly unfunded tax and energy support give-aways, which raised the prospect of the need for even higher interest rates than had been expected to head off inflation. Sterling initially went into freefall, but interestingly has since recovered most of its immediate losses.
Company reporting is currently in a “phoney war” stage, with downgrades due to the worsening economic climate acknowledged as being inevitable as we move through the second half of the year and into 2023, but many industrial and construction cyclicals still reporting robust trading on the back of extended order books. So far, it’s only the consumer discretionary stocks that have started to warn with consumer confidence impacted by higher energy bills and the prospect of higher mortgage payments, albeit the mini-budget initiatives with respect to the fuel price cap, removal of higher NI payments and the bringing forward of income tax cuts may help alleviate this somewhat. Whilst the prospect for an economic downturn and resultant earnings downgrades is now seen as inevitable, the important thing from our point of view as fund managers is the extent to which they are already priced into equity valuations of the Fund’s more cyclical holdings.
At the Fund level, the main detractors to performance in September were the construction and industrial cyclicals SigmaRoc and Synthomer, as well as consumer media plays Future and LBG Media, as investors shied away from more cyclically exposed shares. Brooks MacDonald also fell back as its net client money inflows were offset by mark-to-market adjustments. On the positive tack, the Fund’s technology holdings, where we have recently been increasing weightings, performed well with GB Group rallying after a takeover approach, and Craneware and Big Technologies responding well to reassuring results.
On the trading front, we raised liquidity mainly from holdings which are subject to recommended takeover offers where we can see minimal further upside – namely Homeserve, Euromoney, RPS and Attraqt. Elsewhere, we took advantage of strong share price performance to trim holdings in Craneware (on valuation grounds), TP Icap and Balfour Beatty. We also started to sell down the Fund’s position in Convatec, after its promotion to the FTSE100. We selectively topped up a few holdings which we felt were getting oversold, namely Clarkson, Inchcape, Future and Boku and also started buying back Alliance Pharma, which we’d only recently been selling down, after its shares dropped significantly on concerns about their H2 weighting.