There was no real sector leadership in the last month, albeit miners continued their recent run, and in the short term the direction of the UK equity market seems to be a reflection of the sterling/dollar rate, not unsurprising perhaps given its volatility and the weighting of dollar earners amongst the mega caps. Interestingly there appears to be a growing school of thought amongst commentators that sterling is currently pricing in a ‘hard Brexit’ and that as the underlying domestic economy is set to remain resilient, there is scope for sterling to bounce from current levels. This is potentially a ‘theme’ for the second half of the year but it should benefit us as it would be good for sentiment with respect to our domestic earners and would probably help to reverse some of the recent ‘currency’ trades. In the meantime, GDP growth forecasts for the domestic economy have moved up to two percent, at the upper end of the range for the current year. Whether or not this top down economic strength translates into bottom up earnings upgrades remains to be seen as we expect the general tone of year end corporate statements to remain ‘cautiously optimistic’.
At the stock level, our two top contributors to performance over the month, Fenner and Games Workshop both announced that trading was ahead of expectations and Watkin Jones and Cape announced solid updates. On the downside, Braemar Shipping, St Ives and Cobham all disappointed but the reasons were all company specific rather than any reaction to changes in the macro environment, and we have subsequently topped up our holding in Braemar. We also added to positions in GVC, Epwin, Jupiter Fund Management and Shoezone, which stands to be a beneficiary of the recently announced changes in rates for retailers and who once again announced a special dividend. We also added a position in Pennon, a utility company, to the portfolio. We realised funds from, amongst others, Cobham which announced a dividend cut with its downgrade and from Electrocomponents and Hill & Smith after strong performance. Importantly for our fund we expect to see a confirmation of the strong growth in dividends that we saw at the interim stage in the upcoming final results season at the end of February.