One consequence of the Trump victory is that after years of our macro thoughts being dominated by the effects of Quantitative Easing it is now time for a re think and we have already seen the first signs of a shift from the bond proxy equities into sectors and stocks more geared to benefit from fiscal stimulus. This also seems to be the way forward at home and at the margin a switch from ‘quality growth’ into more ‘value’ orientated stocks should benefit our portfolio although we understand that the noise surrounding Brexit negotiations continues to present a headwind for small and mid cap share prices. Although the Autumn Statement turned out to be less of a ‘giveaway’ than some had hoped, the good news is that the domestic economy is proving to be increasingly resilient and in the short term at least, corporate UK appears to be dealing well with the threat of increased input costs. In the current political environment however we expect company directors to continue to err on the side of caution with respect to outlook statements which may detract from the generally robust short term ‘bottom up’ news. We believe however that it is in everyone’s interest that a culture of ‘under promising’ and ‘over delivering’ prevails.
One knock on effect of the fallout from Brexit and the subsequent weakness in Sterling was the belief amongst a number of commentators that there would be an increase in the number of bids for UK companies by third parties with access to US Dollar or Euro funding. In the last month we have had offers for two of our holdings. There was a recommended cash offer for Brammer at 165p per share and an offer for Lavendon at 205p per share, and we expect that this upturn in corporate activity will continue into the New Year. In terms of positive contribution both Cobham, US defence spend, and Hill and Smith, US infrastructure spend, responded well to the US election result and Electrocomponents performed very strongly after earnings upgrades. We took the opportunity to top slice the latter two holdings into the share price strength on dividend yield grounds. Stocks that performed relatively poorly in the month included Essentra, after an earnings downgrade, DFS, after a large placing of stock, and Cape, after further issues arose with some historic litigation cases. Unquestionably, the change of political leadership both here and in the US will lead to shifts in top down strategies by the investment communities and the early signs are that we should be beneficiaries of this trend.