After a summer when earnings upgrades were broadly positive across the market, the latter part of the month saw a slowdown in the recovery trade in UK facing equities as earnings momentum stalled. As companies reported ‘in line’ numbers and upgrades were put on hold, investors started to bank profits. This has since been accentuated by increased macro worries. Whilst the issues of labour shortages, supply constraints and rising energy prices are global, the sight of queues at the petrol pumps appears to have put valuations of domestic facing equities temporarily on the back foot. As fears of ‘stagflation’ have been mentioned in the press, i.e. rising inflation with little economic growth, it is important to note that the current economic travails appear to be short term supply side related and the demand side of the equation still appears to be holding up well. One logical extension of the current price rises however is that most commentators are now moving their expectations of interest rate rises to the left.
In terms of performance, Drax rose in response to rising energy prices and Vesuvius fell for the same reason as it supplies the steel industry where energy is obviously a big cost of production. Elsewhere, Dunelm responded well to good results and the announcement of a special dividend. Bakkavor and Telecom Plus continued to recover from oversold valuations and SThree was strong. On the downside, Mortgage Advice Bureau and Strix fell after good ‘in line’ results. On the trading front we continued to recycle funds from companies with relatively low dividend yields to stocks with higher yields for an uplift in income. To this end we reduced our exposure to Flowtech, RPS, and Sthree, at good levels of value and reinvested monies into Ashmore, DFS, Direct Line and Tate and Lyle amongst others. Given the recent high-profile logistics and staffing issues within the economy it is important to note that whilst we are small and mid-cap investors, the companies that we invest in are actually quite sophisticated in the industries in which they operate. Whilst they are not immune from the well documented short term problems, they do tend to have the strength and depth of management and technical resource and ability to deal with the worst effects of the issues.