UK Multi-Cap strategy - October 2021

UK GDP forecasts ahead of market expectations

• Evidence from companies that supply chains are starting to ease
• Bank of England remains ready to react to inflationary pressures
• Quality and growth companies performed better in the second part of the month

What’s happening?

October was once again dominated by macroeconomic and geopolitical news flow. The UK Chancellor’s budget revealed UK GDP¹ forecasts ahead of market expectations, as well as a reduction in government borrowing projections. The budget itself was more expansionary than expected, contrasting with the announcement of tax rises earlier in the year. Combined with ongoing news flow around supply chain disruption, demand/supply imbalances and widespread inflationary pressures, the short-term backdrop suggests that the cost of borrowing should rise.

The Bank of England remains ready to react to inflationary pressures but to date has kept base rates on hold, to the surprise of market participants. Generally speaking, however, global central banks appear inclined to reduce their support as both economic growth and inflation expectations rise.

The FTSE 100 (+2.2%² ) outperformed the FTSE 250 (ex-Investment Companies, -0.2%² ), while the FTSE Small Cap (ex-Investment companies, -1.2%² ) weakened somewhat. Year-to-date, the FTSE All Share index has gained 15.6%² on a total return basis.

Portfolio positioning and performance

The strategy underperformed the FTSE All Share in October. Quality and growth factors started the month weaker than value, performing better towards the second half of the month. From a sector perspective, the underweight to the financial sector, and overweight to the technology sector contributed negatively to performance. Our underweight to the consumer staples sector was positive. 

Positive stock performances of note included Ashtead (equipment rental company) and Croda International (a specialty chemicals company). Not holding Rio Tinto, Unilever and British American Tobacco also proved positive. Detractors over the month include On the Beach (online retailer of beach holidays), Dunelm (a home furnishings and furniture retailer) and Serica Energy (a gas and oil company). Banks did well in the month, not holding HSBC detracted from performance. 

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

Outlook

Given the macroeconomic news flow, the equity market is being influenced to some degree by movements in global bond markets. Debate around the likely duration and extent of inflationary pressures continue to dominate and the UK consumer has seen the impact of supply/demand imbalances in many areas of their lives, including on petrol forecourts and via news headlines around impending utility bill inflation. Although the commentary is unrelentingly inflationary, we are starting to see emerging evidence from companies that supply chains are starting to ease. Increasing supply or demand destruction? Equilibrium would be welcomed by companies and should contribute increasingly to the ‘inflation is transitory’ narrative.

In this environment, we continue to focus on those companies that we believe can compound their earnings and where balance sheet strength is supportive of that growth. 

No assurance can be given that the UK Multi-Cap Strategy will be successful. Investors can lose some or all of their capital invested. The UK Multi-Cap strategy is subject to risks including; Equity; Smaller companies risk; Liquidity risk; Investments in small and/or micro-capitalisation universe; Investments in specific countries or geographical zones.