UK Mid Cap Strategy - August 2021
UK stocks rose as they benefited from continued economic optimism
- Company results have generally been strong and ahead of market expectations
- 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%2 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%2 . 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 rose in absolute terms, however it underperformed against the FTSE 250 Ex Investment Trusts. Stock selection detracted from performance over the month, with Meggitt, an engineering group which specialises in aerospace, defence and electronics products (not held), of particular note. Meggitt’s share price increased due to a bid from Parker Hannifin, an industrial components company. Stock selection within the Basic Materials sector was the largest contributor to outperformance, whereas Industrials was the largest detractor.
Detractors from a stock perspective include Darktrace (a cyber-security company), Breedon (a manufacturer of construction materials) and Just Group (a provider of financial services). Positive stock performances of note included Hill & Smith (construction materials business), Spirent (a communications business), Genuit (manufactures of innovative piping, underfloor heating and energy-efficient ventilation) and Auction Technology Group ( which operates six of the world’s leading marketplaces for online curated auctions). Hill & Smith and Genuit saw their share prices rise after both announced strong half year results.
We used share price volatility to add to core holdings and make reductions. During a quiet month for trading, there were no new positions taken or positions closed.
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.
No assurance can be given that the UK Mid Cap Strategy will be successful. Investors can lose some or all of their capital invested. The UK Mid Cap strategy is subject to risks including; Equity; Smaller companies risk; Liquidity risk.
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UK Equities
The UK equity market is a key geographical market and source of potential returns for investors globally.
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