June 2009
May was the third consecutive positive month for UK equities this year. The FTSE All-Share
Index appreciated by 4.2% in total return terms and while smaller companies shared the
positive trend, the FTSE SmallCap Index (ex Investment Companies) had a more muted total
return of 1.8%. Strength in key commodities, including oil and copper, was reflected in an outperformance
by smaller metals and mining companies.
The continued recovery is being driven by the perception that the macroeconomic data is
stabilising and a major depression has been avoided. Recent statistics show that the rate of
economic decline is decelerating rather than stabilising. With stock levels reduced sharply last
year, the second half of 2009 should benefit from a re-building of inventory levels. The May CBI
output expectations survey also supported the notion that conditions are bottoming out while
other areas such as retail sales and the housing market are showing signs of improvement.
However, it should be remembered that the economy is still in recession and it is unclear both
when the economy will recover and how strong the recovery will be.
During the month, we reduced the holding in James Fisher and Sons and topped up the
holdings in Greggs, Hornby, Morgan Sindall and RM. In the fixed interest portfolio, the holding
of Marks & Spencer 5.875% bonds was switched into Anglian Water 6.75%.
Despite the recent rally, smaller companies continue to trade at a discount to their larger
peers. There is the potential for equities to re-rate further as they are still on historically low
valuations. However, it would seem likely that at some point investors will want to see tangible
signs that we have hit the trough of this economic cycle in order to have confidence about the
recovery. We remain committed to focussing on good quality businesses with strong balance
sheets and transparent earnings and cash flow.