After a particularly difficult few months, we started the new year on a more positive note. In the US, the Fed appeared to adopt a more ‘dovish’ stance which helped market sentiment although at the same time there were increased fears with respect to a slowing Eurozone economy. At home, high employment levels and rising real wages underpinned a resilient economy but both business and consumer confidence indicators were in decline. The raft of UK Christmas retail trading statements were generally poor with the blame being apportioned between the ‘Brexit’ effect, the weather and rising costs. Ironically, our two best contributors to performance in the month were DFS and Shoe Zone, both domestic retailers. Commentators are starting to highlight the relatively attractive valuations of a wide range of UK equities based on historic comparisons and the fact that fund managers are believed to be generally underweight in UK equities as an asset class. Whilst this should provide some support, it is still the case that at the margin corporate earnings downgrades outnumber upgrades across all market cap size bands which is acting as a headwind with respect to short term momentum.
The best performers in the fund in the last month were concentrated amongst our domestic earners and included Costain, Go Ahead, Dairy Crest and Bellway. Kier also bounced after its recent rights issue. On the negative side, Personal Group fell as it highlighted a cautious outlook for the coming year and Halfords fell after releasing a trading update. We added to several holdings including BBA Aviation, Morgan Advanced Materials, Tyman, Victrex, Senior and XP Power. Interestingly, these stocks all have a substantial level of overseas earnings and it is noticeable within our small and mid cap universe that we can now access non-UK earnings at similar levels of valuation to domestic earners which has not been the case for some time. We will inevitably remain predominantly a UK centric portfolio with respect to underlying corporate earnings, but we believe it to be in our best long-term interest to be able to add some geographic diversity to our underlying cash flows where we can.