UK Multi-Cap strategy - August 2021

Company results have generally been strong, ahead of market expectations

• UK stocks rose as they benefited from continued economic optimism
• The UK’s GDP¹ rebounded in the second quarter
• The Bank of England has maintained its accommodative stance

What’s happening?

UK stocks rose as they benefited from continued economic optimism and the announcement of some strong corporate results. Declines in some commodity prices hit mining stocks and pressured the broader market around the middle of the month, although the Federal Reserve’s reassurances over its tapering plans helped shares rebound towards month end. The Bank of England (BoE) maintained its accommodative stance, although it indicated that it could start raising interest rates sooner than previously expected.

The UK’s GDP rebounded in the second quarter, growing by 4.8%²   from the previous three months, following a 1.6%² contraction in the first quarter. The expansion was driven mainly by household consumption and government spending. The second-quarter recovery left GDP 4.4%¹ below pre-pandemic levels.

The UK inflation rate fell to 2.0% year on year in July, from June’s recent peak level of 2.5%¹ . Base effects were a key factor as inflation rose materially in July 2020 when the first COVID-19-related lockdown was eased. Meanwhile, the producer price index rose by 4.9% year on year in July, a near-10-year high² . The increase largely reflected a change to the weighting of transport equipment in the index, while pricing pressures intensified in petroleum, metals and machinery.

Portfolio positioning and performance

Over the month, the strategy was up in absolute terms, and outperformed the FTSE All-Share Index. Stock selection and sector allocation both contributed to outperformance. The overweight position to the industrials sector, and being underweight in the basic materials and consumer staples sectors were positive contributors to relative performance over the month. Stock selection within consumer discretionary was also positive. However, stock selection within the industrials sector detracted from performance. Within this sector, not owning Meggitt, which received a takeover bid, contributed negatively.

Detractors from relative performance included Darktrace (cybersecurity) and FeverTree (a beverage company). Positive stock performances of note included Future (specialty media) and Spirent Communications (communications business).

We used share-price volatility to add to core holdings and make reductions.

Outlook

Concerns about the spread of the Delta variant of COVID-19 and signs of slowing economic growth in areas of outbreak will continue to occupy the minds of investors and central bankers alike. For the time being, worries earlier in the month that the Federal Reserve was about to start scaling back its massive quantitative easing programme have eased, with the Federal Reserve’s ‘tapering plans’ now moving further into the future.

Company results have generally been strong and ahead of market expectations in many instances. It is notable, however, that increasing numbers of businesses are reporting both input cost inflation and issues with logistics. How companies navigate these issues and how long they persist will impact the path of profit growth over the remainder of 2021.

We continue to focus on those businesses that we believe can compound their earnings, are well managed and have strong balance sheets and pricing power.