In the past month the UK equity market has proved to be remarkably resilient in the face of the shock of the referendum result. Whilst a significant number of large caps have been buoyed by currency driven earnings upgrades the pleasing aspect of the last month for us has been the increase in the prices of small and mid caps. It is still the case however that a number of our ‘Brexit’ sensitive stocks, predominately housebuilders, estate agents and retailers are still trading at levels substantially below those immediately prior to the vote. This reflects fears that the general macro uncertainty will reduce the volume of housing transactions and retailers may have to absorb some of the inevitable price inflation on imported goods if consumer confidence remains fragile. It is interesting to note that six weeks after the vote commentators now appear to be discussing the extent to which domestic GDP forecasts will have to be reduced rather than how deep the recession will be. As we are meeting company directors over the interim results season it is too early to relate any feedback on the ‘real’ effects of ‘Brexit’, no one currently knows. What is important to the corporate sector however, is that there is no liquidity crisis, balance sheets are generally strong and there is a period of two years after Article 50 is invoked that should at least provide some sort of status quo.
The uplift in the price of the fund was driven by a number of factors. As the worst fears of investors with respect to the consequences of the vote subsided there was an inevitable bounce in the price of some of our worst hit ‘Brexit’ stocks such as housebuilders and retailers and we expect these stocks to remain relatively volatile in the short term. We also had a number of stocks that performed well after releasing positive results including RM Group, FDM and Fidessa. McColls also contributed strongly as it purchased 288 stores from the Co Op, and we added to our holding as they issued stock to raise money as part of the purchase price. There was no real ‘theme’ to the underperformers which included Centaur Media, Epwin and Go Ahead. We added to a number of existing holdings after the sell off. We bought DFS and Restaurant Group on the basis of very attractive cash flow yields and added to Greene King and Marston’s which had performed poorly but which we believe have extremely resilient ‘low ticket’ business models. After the fall in the previous month we are looking to rebuild the capital value in the portfolio as quickly as is practically possible. An important source of reassurance in the last month has been the number of companies reporting robust results but the key for us remains domestic earners closing the relatively wide valuation gap with the recently upgraded overseas earners.