December was dominated by the ever-changing posturing surrounding a deal or no deal trade agreement with the EU as the timetable was extended. It was ultimately resolved as an agreement was signed just before the year end to the general relief of financial markets. Whilst we view this as good news for sterling and for domestic equities, there will inevitably be scare stories over the coming months as companies adapt to a myriad of new rules and regulations with respect to imports and exports, particularly as UK ports are already under strain from issues relating to the pandemic. In spite of this, the consensus amongst analysts is that stock levels were increased ahead of the trade deal deadline which should help to alleviate any supply shortages in the short term. In the middle of the month, a new more virulent strain of the virus led to the government implementing more restrictive measures culminating in a new national lockdown. Taken in context with the ramp up in the vaccination programme, the net effect on the equity market has been broadly neutral as investors seem to be prepared to look through the immediate problems to a strong economic recovery later this year and into next. One of the key drivers of this for the UK economy is expected to be a reduction in the relatively high savings ratio with the consumer ‘bounce’ at the end of the first lockdown providing a very relevant comparison.
Whilst we agree with recovery story, we are also cognisant of the fact that some dividends will take slightly longer to get back to previous levels because there will inevitably be a period of catch up as payments mostly reflect historic levels of activity. As income mangers, we are actively rebuilding our total dividend and shifting some of our investment away from slow payers into stocks that are able to pay good levels of income early remains part of that process. At the portfolio level, our best performer was Signature Aviation which was the subject of a takeover approach and we do expect to see a pick up in UK focussed corporate activity generally given current levels of valuation and the removal of the Brexit uncertainty. Marstons rose as it announced a deal to operate a chain of pubs in Wales, Redde issued reassuring results and Polar Capital was buoyed by an acquisition. Relatively poor performers included Devro, RPS and Strix. Looking forward as ‘value’ investors an improving macro environment is a positive for us and at the same time we should benefit as increasing levels of dividend payments by companies are reflected in share prices.