At the end of a quarter that was overshadowed by fears over supply shortages, rising inflation and latterly the new Covid variant, there was some last minute relief for investors as the government in England appeared to be content with a relatively low level of new restrictions. Despite the mostly modest restrictions imposed under Plan B, the re-emergence of Covid as headline news has undoubtably affected both consumer and business confidence in the short term. The market was surprised as domestic interest rates were raised in the UK, albeit only by 15bp to 25bp. Perhaps more significantly for investors the mood from the Fed in the US appears to have shifted to being more ‘hawkish’ than for some time, and commentators now expect US rates to rise more quickly than was previously expected in the face of increased inflationary pressures. The policy makers do however appear to be happy to look at the recent surge in Covid cases as fundamentally a short-term issue and seem to be looking through to a good increase in economic growth moving through next year. In this respect with the high vaccination rates and the apparent desire to return to normality as soon as possible, the domestic economy looks well placed for a relatively early recovery.
In terms of performance, Redde Northgate was our top contributor over the month as they released a good set of results and we took the opportunity to top slice our holding on weighting grounds after it had gone ex-dividend. We also took money out of FDM and Drax, as they performed well, on yield grounds. Telecom Plus was strong as a perceived beneficiary of the turmoil in the energy supply market. On the downside Synthomer was our biggest negative contributor on the back of a bearish broker note and SThree fell over concerns that investment spending will dilute the potential earnings upside in the short term. As we enter the new year NIC increases and energy price rises could dampen consumer spending, but the strong savings ratio and continued high levels of employment and record vacancies provide some comfort. It appears that supply issues are beginning to ease, increases in wage rates have started to slow, demand remains strong and inventory levels appears to be low, all of which offer companies strong gearing into a post pandemic economic recovery. At the same time rising inflation has historically led to periods of relative outperformance for the types of ‘value’ stocks that we invest in. Last year dividend payments returned slightly faster than expected and we look for this positive trend to continue. As an income fund we continue to look for companies that can grow dividends faster than the market as this should ultimately be reflected in positive share price performance in a low interest rate environment.