Domestic earners bounced strongly in reaction to the initial market euphoria over the election result but this was quickly tempered by a healthy dose of realism as the prospect of a ‘no deal’ exit, albeit in a different guise to before, was back on the table. Despite this there has been a notable pick up in business confidence that should translate into increased capital spending and an improved outlook for corporate UK. Whilst we await the details of the first budget for over a year, the backdrop of increased Government spending and rising real wages should add to the attraction of the UK economy and UK companies as a place to invest. Although there has been increased flows into UK equity funds recently, consensus estimates suggest that investors are still underweight the UK overall. We expect that continuing fears over global trade tariffs and rising tensions in the Middle East will continue to affect equity risk premiums.
In the last month we continued to invest our takeover proceeds whilst retaining a slightly higher than average cash weighting ahead of the election. We added to companies geared to the UK economy such as Bellway, Restaurant Group and N.Brown, overseas earners such as Vesuvius, Devro and Vitec and added one new holding, Keller. Looking forward we expect a volatile first quarter for company earnings and share prices as they reflect the slowdown in economic activity in the last few months of last year, and we have already seen this in the trading statements of some of the retailers and industrials. As we move through the first half, we will hopefully see an upward trend in earnings estimates amongst a meaningful cross section of domestic earners. If this is the case and fears over the progress of Brexit trade negotiations prove to hold back valuations then we fully expect private equity to continue to take a longer term view and continue on the acquisition trail for UK assets