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MI Chelverton UK Equity Income Fund – Monthly Manager Commentary – July 2022

MI Chelverton UK Equity Income Fund – Monthly Manager Commentary – July 2022

The rising rate of inflation continues to dominate the headlines and the policy response to raise interest rates both here and in the US looks set to continue. The continued strength of the US Dollar remains a relative plus for the FTSE100 compared to UK small and mid-caps. The prospect of more interest rate rises into a low growth and slowing economy has further undermined the relative attraction of UK facing companies. On a more supportive note, the domestic financial system is well capitalised and the economy remains at levels of full employment. As the results season starts earlier and earlier, we have had updates from a reasonable number of our holdings. As a generalisation, the industrial cyclicals that we hold are trading in line with estimates and calendar year 2022 appears underpinned by healthy order books. Input cost inflation is largely being passed on, albeit with some time lags. On the other hand, we are starting to see earnings downgrades in our domestic consumer cyclicals as the rising cost of living, particularly energy costs, begins to bite and consumer confidence falls. The real issue for corporate profitability is the sheer level of uncertainty across all sectors of both the global and domestic economies as we look through next year. Suffice to say that analysts are tending to err on the side of caution.

Across the market we are seeing falls in the share prices of companies where earnings are downgraded and positive statements elicit little sustained share price performance. We have been here on numerous occasions before and it is typical of a wholesale shift to a ‘risk off’ approach by investors. History suggests that a lot of the negative short term price moves are exaggerated although we probably need to see inflation falling and increased confidence in companies meeting downgraded numbers for next year for share prices to start to bounce on a sustained basis. In our portfolio Direct Line and Sabre were our worst performers last month as motor insurance claims inflation is set to be higher than expected. This is being driven by increased labour costs, parts costs and the continued high valuations of second-hand cars. Both companies expect this to be a temporary issue as insurance premiums will rise to compensate. Wickes also suffered as analysts downgraded numbers in the face of a consumer slowdown. On the upside, Telecom Plus was strong as a beneficiary of the turmoil in the consumer energy market. On a positive note, dividends continue to come in slightly ahead of our expectations.