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

The headwinds for relative UK small and mid-cap performance that we highlighted last month, namely rising inflation and a strengthening US$, intensified in June. Commentators are increasingly talking about a UK recession and ‘stagflation’, i.e. rising inflation and stagnation of domestic output, adding to the overall feeling of gloom. At the same time there has been an almost inevitable fall in consumer confidence as the cost-of-living crisis remains firmly in the headlines. Consumer spending is an important component of domestic GDP and we have already seen a dramatic sell off in the share prices of a wide range of consumer facing small and mid-cap stocks in anticipation of earnings downgrades. We see some respite in the strength of company balance sheets which should prevent the need for a widespread issue of equity to shore up finances and we believe that the outlook for dividends remains resilient as company boards can essentially let the cover take the strain of short-term earnings volatility.

At the stock level, corporate activity continued as the Directors of Go Ahead accepted an offer for the company and i-Energizer launched a formal sale process. Both of these stocks were amongst our better performers in the month alongside Telecom Plus, STV and Tate & Lyle. Some of our more cyclical stocks, Halfords, Synthomer and Polar Capital detracted from performance. Despite the gloom, company profits for this calendar year appear to be holding up reasonably well, backed up by strong order books, but investors are now looking through to next year where uncertainty persists and where widespread downgrades are deemed inevitable. As ever in these situations, the question is whether or not these are already priced into market expectations and company valuations. Essentially, this point is reached when share prices fall by less than the quantum of earnings downgrades or even start to rise as the worst is deemed to have passed and there is a belief that growth will resume looking forward eighteen months or so.