Bath/Head Office & Unquoted Equity Team:
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Edinburgh Office & European Quoted Equity Team:
MI Chelverton UK Equity Income Fund – Monthly Manager Commentary – December 2016

MI Chelverton UK Equity Income Fund – Monthly Manager Commentary – December 2016

Share prices rose as The ‘Trump Bump’ continued and the US reacted positively to the prospects of an increasingly business friendly environment, lower corporate taxes, a reduction in red tape and increased infrastructure spending. After recent events the bulls would suggest that this is not an unrealistic set of outcomes for our domestic market, albeit it is some time away. At the portfolio level the short term relative outperformance of the ‘cyclical value’ stocks compared to ‘quality growth’ continued and was a benefit to our fund. This is a reflection of the generally more positive economic outlook as the December PMI Index hit a seventeen month high and the manufacturing PMI Index hit a thirty month high as it benefited from sterling weakness. In the near term we expect that volatility will remain high and the ‘currency trades’ will dominate, but looking further out we expect that resilient domestic economic growth will lead to a more stable and stronger sterling which should highlight the valuation attractions of our domestic earners.

In the last month a number of stocks performed particularly well. Our best performer Lavendon was the subject of increasing competitive bids, and we expect any continued weakness in sterling to be reflected in a pickup in corporate activity as we move into 2017. Games Workshop released a very upbeat trading statement, RWS produced an excellent set of results, TT Electronics and Northgate bounced strongly and Essentra started to recover from a recent sell off. Interestingly these companies represent a very broad spread of businesses but they all do have reasonable exposure to overseas earnings. On the downside, Novae fell after a profit warning and Braemar Shipping, Hostelworld and Fenner all performed relatively poorly. With a buoyant domestic stock market there is a need for earnings growth to remain positive to underpin the momentum and not just reflect one off currency translation gains. Importantly for our portfolio we do believe that there is scope for multiple expansions as we move through the year across a reasonable number of stocks, particularly those ‘UK’ centric stocks that have still not recovered to pre ‘Brexit’ levels of valuation. The prospect of earnings growth, however subdued, accompanied by selective multiple expansion and rising corporate dividends does, we believe, represent a relatively attractive investment proposition for the coming year.