As investors look through lockdown to a period of economic recovery, the debate has moved increasingly to one of ‘value’ versus ‘growth’. It is well documented that growth as a style performed relatively well through the pandemic and commentators have been searching for a catalyst that may start to close the performance gap moving forward. To this end all eyes are now firmly on the recent increase in the US long bond yield, a lead indicator of rising inflation, and something that has historically provided a tail wind to ‘value’ investors. Over the coming months we expect an increase in inflationary pressures at home after the effects of the rise in the oil price and a ‘re-opening’ bounce in domestic consumer spending start to be reflected in macro data. We have seen the first signs of increased investor interest in our investible universe and this will hopefully be sustained moving forward as the recent build up in the domestic savings ratio starts to be run down. The busy results season has started well with most numbers coming in at least in line with expectations, although some momentum has been lost in US Dollar earners as the relative strength of Sterling is holding back this year’s earnings progress. The lack of downgrades in these stocks however does reassure us that generally analyst estimates remain conservative.
As the vaccine rollout continues unabated our best performers over the last month include a number of stocks geared to a reopening of the UK economy including Restaurant Group, Rank and Saga. Whilst the roadmap out of lockdown may appear to be too slow for some and too fast for others it should at least give companies a definitive timeline with respect to their own move to more normalised trading. One of the biggest operational frustrations for the stocks that we invest in over the past year has been the constant changing of external rules and guidelines making both day to day management and forward planning difficult. Wilmington performed well after a good set of results and a good investor update. The pandemic has forced the company and its clients to adopt a more digital approach to their relationship at a much faster rate than would have happened otherwise and this will benefit both parties in the future. The fact that a lot of our stocks have brought forward ‘change’ in their business models throughout the last year makes us believe that the quality of underlying earnings in our portfolio will be improved as profits recover. Close Brothers continued to rise after last month’s update and DMGT shares were up as they sold their Hobsons Education division for a price that was ahead of analyst expectations. On the downside, Bloomsbury gave up some of its strong recent gains, RM fell on further worries over school reopening and we added to Ultra Electronics as it drifted off ahead of results.