With Germany in a technical recession, indications of a slowdown in China and continued worries over the US debt ceiling, the last month was a relatively poor one for risk assets on a global basis. This was compounded at home as gilt yields continued to rise, undermining the prospects for equity share prices which continued to suffer from fund outflows.
At the heart of the problem for the UK is the recent inflation figures which have led a number of commentators to raise forecasts of peak interest rates from 5.0% to 5.5% which seems a long way off from where we are now. The timing of reaching the targeted 2% inflation rate has also moved firmly to the right and we appear to be in a world in which analysts are looking at the UK as an inflation outlier. Whilst fund managers remain cautious about the UK and private equity awaits more certainty over borrowing costs there is one group of buyers who are upping their investments in UK equities on almost a daily basis and that is the companies themselves. Each morning our screens highlight the sheer number of companies buying their own shares back into treasury and this, to us, is tangible evidence of the disconnect between the rather confused and volatile top-down view and the bottom up perception of value.
At the portfolio level we sold our holding in Numis after the bid and after we had taken the dividend. We also raised funds from Kitwave after a very strong run and Vistry. We added to a number of stocks that had recently underperformed but where we believe that medium term prospects are very attractive including Keller, Marshalls, Telecom Plus and FDM. Watkin Jones detracted from value in the fund over the month. It develops student accommodation and build to rent properties which are sold to institutional investors. Both of these sectors have been ‘hot’ as demand for the underlying product remains strong but there is a temporary slow down in the sales pipeline as investors readjust in the face of volatile interest rates and funding costs. Headlam, a distributor of carpets also fell as it highlighted a slowdown in consumer demand. Sabre the motor insurer was a positive contributor as it now looks as though claims inflation is stable and premiums are rising, and Morgan Sindall, Tyman and Hilton Foods performed relatively well.