Up until this summer, we have seen a one way trade post BREXIT out of UK cyclicals into overseas earners. This was initially driven by Sterling’s devaluation and has been fuelled this year by commentary on a deteriorating UK macro outlook, when compared to a relatively strong US economy and a broadly based recovery in the Eurozone. This trade has now continued to the extent that the rating disparity between overseas earners and UK consumer cyclicals is quite extreme. However, a number of factors could start to challenge the perceived merits of these two asset classes. The recent strength of Sterling, prompted by the prospect of higher UK interest rates to head off inflation, is creating an earnings translation headwind for the already relatively highly rated overseas earners. Interestingly, despite the gloomy top-down forecasts, UK employment has so far remained persistently strong. Against this back-drop and with government heralding a softening of the public sector pay cap, we could see a pick-up in wage inflation. Provided that any rate rise is not too aggressive, these two factors if they play out should improve the outlook for UK discretionary spending, which has been undermining the valuations of UK consumer cyclicals. The timing of any change in sentiment is likely be affected by the tone of BREXIT negotiations which so far have only tended to undermine business confidence, but from a Fund perspective we certainly need to be alert to any in change economic trends, having focussed on structural growth and overseas earners where we have seen reasonable value post BREXIT.
Over the summer the market has been flip-flopping around with no discernible theme or direction, and August was no exception. The Fund had an uneventful month, marginally outperforming its IA UK All Companies benchmark, with no major individual stock movements either up or down. During the month we took advantage of the weakness in Spectris’ share price to build up our holding from a relatively small weighting, as the company shifts its emphasis from being an industrial controls and instrumentation electronics business to a full service productivity solutions provider with an integrated hardware and software offering. We also started a holding in SThree, the international staffing agency focussed on the technology and life science sectors.