July 2010
Markets were again weak during June, with the FTSE All- Share Index declining by 4.9%. Larger
companies underperformed their smaller counterparts though in part this was a function of the
ongoing travails of BP. The news from the US was quite disappointing, especially the housing
data, which saw national home sales fall by 33%, and payroll and retail sales numbers come in
below expectations. Conversely US Industrial Production was better than expected, the revised
EU Q1 2010 GDP reading remained positive and China indicated that is was to allow a limited
increase in the strength of the yuan. Appetite for risk continued to decline. Therefore whilst
this macroeconomic data could best be described as mixed a greater level of importance was
applied to negative news flow. It is notable that two of the more commonly used indicators of
investor sentiment now suggest that risk aversion is approaching levels that have historically
represented a buying opportunity.
Merger and acquisition activity continued to be a feature of the market especially amongst
small and mid sized companies. The Trust has benefited from bids for Chloride Group and
Rensburg. Both positions have now been exited. In addition Forth Ports was bid for though the
bid subsequently failed as shareholders didn’t believe that it represented a fair price for the
company. We have taken advantage of the subsequent share price weakness to continue to
build our position. We also took advantage of the declines in the market to re-deploy some of
the proceeds from the holdings that were acquired. Top ups included, Aveva, Mothercare, Savills,
Helical Bar, Dechra Pharmaceuticals, Bellway and Bloomsbury. We also exited the holding in
Marshalls where we became increasingly concerned about the outlook for big ticket consumer
spending in the UK and the impact that any decline would have on their ability to maintain
the dividend.
In the UK the emergency budget has been generally well received by markets. The clear
determination of the coalition Government to address the deficit was rewarded with a
strengthening of sterling and gilts. The reduction is to be split with approximately 77%
coming from cost reductions and 23% from tax rises, of which the 2.5% rise in VAT to 20% is
the most notable. How this will eventually impact the outlook for companies remains to be
seen as we await the details of the where the cuts will be implemented, news is due at the
autumn Comprehensive Spending Review. It is clear though that the current administration is
prepared to take difficult decisions as evidenced by this week’s announcement that previously
committed capital spending on education is to be curtailed.
There is a clear divergence of view between the UK and much of the rest of the developed
World, with the UK opting to tackle the deficit immediately. Many others adopting a more
relaxed approach and choosing to continue spending in an attempt to support their economy’s
recovery in the anticipation that they will be able to take the necessary actions at a later date.
China has begun to tighten policy in some areas, most notably in housing. Given the role
that developing markets will play in driving Global growth this is beginning to cause concern
amongst some investors, as is perhaps most clearly illustrated in the performance of
the miners.
The outlook is uncertain but we continue to identify companies with solid balance sheets, cost
bases that are capable of coping with a slowing in the pace of recovery and that are trading on
attractive valuations.