A month on from the election and, despite the Tories and the DUP finally reaching some form of agreement, political uncertainty still persists and Brexit looks like becoming a ‘legislative battleground’. This all serves to undermine business optimism and consumer confidence in the short term and we have tangible evidence of this with the warning from DFS, the sofa retailer, with respect to current trading. A year after the Brexit result, the ‘easy’ money has been made on the currency trades and the earnings upgrades in the overseas earners that were driven by falling sterling and are arguably now largely priced in. The outlook for domestic earners is more challenging, as the effect of imported price inflation on both the economy and corporate margins starts to take effect. Whilst weak sterling has provided a tailwind to the market as a whole as it has benefited the ‘mega cap’ dollar earners, we now need to see evidence of real turnover growth and productivity gains to drive share prices sustainably higher. In a quiet time for company newsflow, we are going through a period of ‘price drift’ in the market as there is no discernible sector or style leadership and investors remain relatively cautious.
The Fund experienced a 1.47% negative return as the market drifted last month, mildly outperforming its IA UK All Companies benchmark. There were very few major movers. Revolution Bars continued to soften after last month’s profits warning, whilst Games Workshop was the Fund’s best performer after yet another strong trading update.
From an investment perspective we sold out of our holding in Severfield, the structural steel business, because, despite an excellent turn-round by management and strong current trading, we’re becoming more wary about the outlook for the UK commercial property new build market. We also exited our position in Trifast on valuation grounds, after strong performance over the two years we have held a position. On the buy side we participated in the IPO of Ethernity, a software solutions provider, whose patented technology enhances the performance of Cloud based networks, reducing power consumption and latency. We also added a position in Clarkson, the market-leading ship-broker, with unrivalled technology and market intelligence in the global shipping market. These additions reflect the Fund’s transition towards more overseas exposure and structural growth.