Confirmation the UK would begin re-opening the economy on schedule saw the market push higher in the early weeks of April, with Consumer stocks particularly benefiting but broad-based optimism creating a rising tide for all ships. A steady trickle of positive Q1 updates towards the end of the month kept the momentum going, although earnings upgrades tended not to result in commensurate share price rises. While this suggests some expectation has started to creep into current valuations we believe that companies are keen to keep some powder dry for later in the year which will support continued improvement in investor sentiment towards the UK. This should in turn underpin asset prices. As the global economy restarts, investor attention has turned towards inflation, with the rise in commodity prices and the US long bond yield seen as an early warning sign, although central banks seem content that the upward pressures on CPI are transitory for the moment. A modest level of inflation has historically been a positive for value investors and we are continuing to see increased interest in our investable universe as the market moves into the next phase of the recovery.
In the last month at the stock level there was no discernible theme to either our best or worst performers. Morgan Sindall bounced sharply on the back of a positive trading update, with its Construction and Infrastructure divisions performing well and Fit Out showing very strong momentum, allaying fears in the market that it would suffer from a lack of spend on office fit outs as working practices change post the pandemic. Levels of corporate activity continue to increase with Elementis again subject to a bid approach while Vitec and Diversified Energy Company (previously Diversified Gas & Oil) both made attractive acquisitions. Diversified continues to prove out its business model, making its first acquisition outside of the Appalachia region. The deal resulted in double digit upgrades to estimates, which we expect to flow through to increased dividends in due course. Our poorer performers were also a mixed bunch. Bodycote and RPS are exposed to end markets which are attractive in the medium term but are going to be slower to recover post pandemic while more uncorrelated names such as Direct Line and Rathbones did not participate in the wider market rally.