Despite a difficult month in domestic equity markets, the macro outlook appears to be gradually improving as falling energy prices have reduced inflation expectations for the coming year, and there are signs that the gloom around consumer spending may be overdone. Investors also appear to be looking to a shorter and more shallow recession than before. Whilst central bank rhetoric continues to urge caution, consensus forecasts are now expecting interest rates to peak at lower levels than previously anticipated both here and in the US. After the short sharp sell-off resulting from the Truss mini budget, the ship has steadied somewhat and some sense of normality has started to return to valuations in our investible universe. Investors are looking for a catalyst for some of the substantial fund flows out of UK centric funds in the past year to reverse and a shift from negative to positive corporate earnings momentum should go a long way to providing this. Whilst it still feels too early for this, as we move through this calender year analysts forecasts a year or so out should start to trend upwards. There was a relatively large gap last year between the performance of large caps and small and mid-caps as we were underweight the sectors that performed best, particularly energy. We will however benefit as the prospects for the economy finally start to improve, as we have a very broadly based exposure to general economic activity, and investor sentiment becomes more ‘risk on’.
We are at a stage in the cycle where analyst driven profit downgrades outnumber upgrades within our universe and despite the short-term pain this always creates attractive investment opportunities. We expect to be active through the Q1 results season to take advantage of some of these opportunities and at the moment we are already busy adding a number of new names to the portfolio. In terms of performance there was no obvious link between our best performers which included Redde, Keller, Paragon and Kitwave. On the downside Telecom Plus, iEnergizer and Diversified Energy all detracted from performance in the month. Interestingly though they were all amongst our best performers over the year. We raised funds from selling Devro after last month’s bid and Wilmington on yield grounds and added to holdings in Tyman, Videndum, ITV, DWF and Bodycote.