The fiscal stimulus continues with the ‘plan for jobs’ which, whilst welcome, largely comprised of a set of measures that had already been well flagged in the press and are mostly short term in nature. Obviously, the preservation and creation of ‘good jobs’ is a key factor in determining the shape of recovery, but in an economy with a heavy bias towards domestic consumption it is important that those earning actually go out and spend. The recent re-opening of a lot of the ‘consumer’ economy will give us a much better insight into the nation’s propensity to spend rather than save over the next few months. From a stock perspective, the crisis has highlighted the need for a lot of our consumer-facing companies to move away from excessive fixed costs to a much more variable cost base; witness the current debate about rents, for example. We are obviously disappointed with current levels of dividend income from a lot of our investee stocks but understand that a lot of dividend decisions were taken at the height of the crisis, when economic uncertainty was at its height and that taking government support essentially precludes dividend payments in the short term. This is reflected in the most recent quarter-end dividend declaration. We will have a clearer picture as to the extent and timing of the resumption of dividend payments as furlough ends and the economy starts to recover. Our ‘work in progress’, applying our long-standing investment process to find new investments to improve our income account, continues.
After a strong start to the month driven by an easing of lockdowns globally and a ‘roadmap’ domestically, the early gains were lost as the month progressed and sentiment turned against ‘value’ stocks. As a generalisation these companies tend to be more economically sensitive than tech stocks, for example, and suffer accordingly as economic uncertainty rises. Unfortunately for us, the valuation gap between growth and value has continued to increase. At the stock level, once again there was little commonality in the stocks that performed relatively well for us, such as XP Power, a power supply designer and manufacturer, Polar Capital, a fund management company, and SThree, an economically sensitive recruitment business. The same was true with our poorer performers, including Crest Nicholson, a house builder, Babcock, a defence contractor, and Halfords, the retailer. We are still in an environment where companies are giving little or no earnings guidance to analysts and this has led to, we believe, increased ‘inefficiencies’ in valuations within our investible universe. Historically one way this has been corrected is through investment from the deep pockets of private equity, but they have been notable by their absence since lockdown began. It will be interesting to see as ‘face to face’ meetings are back on the agenda and as earnings momentum starts to turn whether this will continue to be the case.