UK Sustainable Equity strategy - June 2023
Contrary to many market economists, the UK economy keeps beating the rather gloomy predicted expectations for it
- SSE announced that it will invest £40bn in clean energy projects over the next decade
- Positive company updates including Hill & Smith, Bytes and Hollywood Bowl
- RS Group (Progress) was sold
May was a weak month of stock market returns on concerns about a global slowdown following China’s continued weak economic data and uncertainty around the US debt ceiling, which outpaced optimism around slowing inflation in many developed market economies. The FTSE 100 hit a two-month low at the end of the month on these combined headwinds as the Oil & Gas and Metals & Mining sectors came under pressure.
Contrary to many market economists and indeed the Bank of England (BOE) and the International Monetary Fund (IMF) the UK economy keeps beating the rather gloomy predicted expectations for it. Indeed, the IMF no longer expects a recession in Britain this year. It said the steps taken by the government to stabilise the economy and fight inflation would help GDP grow by 0.4% in 2023 rather than contracting 0.3% as it had predicted in April. The Bank of England upgraded their 2023 forecasts in May by its ‘biggest upgrade’ showing that it too had become overly pessimistic.
While the Consumer Price Index (CPI) rate of inflation fell to 8.7% year-on-year in April 2023, the lowest since March 2022, the rate still exceeded market expectations of 8.2% and remains well above the Bank of England’s (BoE) 2% target. Inflation is currently being driven by shop inflation which reached its highest rate since industry records began in 2005. The British Retail Consortium said prices in supermarkets and retail chains rose 9.0% in the year to May, after an 8.8% increase in April, although food prices cooled slightly. In response the BOE increased the cost of borrowing by another 25 basis points (bps), in line with its central bank peers in the US and Europe, to reach 4.5%.
The FTSE All Share (-4.72%1 ) and its constituent parts (the FTSE 100 -5.04%1, FTSE 250 ex-Investment Companies -4.11%1 and FTSE Small Cap ex-Investment companies -1.71%1) all posted sizable declines.
Portfolio positioning and performance
The strategy outperformed the FTSE All Share, in May. In corporate news, May is a busy month of result updates and management meetings. Pleasingly, there was plenty of positive news. Hill & Smith again produced good results driven by their exposure to US infrastructure spend. Bytes also produced excellent organic growth helped by the demand for Microsoft and cyber security products. SSE upgraded their renewable energy capex plan by over 40% to £18bn and Hollywood Bowl indicated that demand for their tenpin bowling experience remains robust.
Other companies to report solid results during the period were Convatec, Intermediate Capital, Kainos, Treatt, Grainger & Genuit. However, Genus indicated that the hoped for recovery in the Chinese porcine market has yet to take place. Marshalls and Kin + Carta also reported tough market conditions.
From an Environmental, Social & Governance (ESG) point of view it is pleasing to note that Nationwide has reduced the interest rate it charges on its green additional borrowing products to 0% for 5,000 households. All of the loan must be used to fund non-structural, energy efficient home improvements such as solar, air source heat pumps or boiler upgrades. Although only small it is these sorts of initiatives that could help demand for our sustainable building material investments in Genuit and Marshalls.
In addition during May, SSE announced that it will invest £40bn in clean energy projects over the next decade. This comes off the back of strong profits due to high energy prices. This is a major ramp up from its normal capex spending, which was £2.07bn in FY2022. The investment will support renewable energy and low carbon grid infrastructure projects in the UK. SSE believes that this will help create more than 1,000 green jobs every year, supporting the sustainable transition.
ESG analysis was conducted on Bytes and XPP during the month with both companies impressing on both ‘what they do’ and ‘how they do it’. An engagement meeting also took place with Blancco Group PLC. Their Board transition requirements are now better understood, as well as their opportunity in the circular economy for E waste.
The portfolio consists of 79% in companies that are deemed as ESG leaders and 21% that are ‘in transition’ and cash.
Selectively added to the existing position in Lloyds (People) following its share price weakness. Higher for longer interest rates and a stronger than expected economy should enable the bank to provide an attractive level of capital return in the form of dividends and share buybacks.
The position in RS Group (Progress) was sold following a change of management team and cyclical concerns over its growth potential.
The main driver of equity markets is still the action in the world’s bond markets. After the initial strong start to 2023 markets have reversed expectations that Central Banks would quickly pivot and have now realigned closer to the guidance of rates being at least on hold as they approach the end of their tightening cycle. Market volatility will remain in the near-term as c risk and uncertainty, it is easy to focus exclusively on the macro and geopolitical news flow and lose focus on the fundamental drivers of profitability and cashflow at the corporate level. Our approach remains centred on owning good quality businesses that can reinvest and compound their returns over time. We continue to believe that understanding longer term structural trends and identifying responsible, reliable and ultimately sustainable companies, in a targeted, focused and active approach, remains the key to longer-term success.
Examples are provided for informational purposes only and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalised recommendation to buy or sell securities.
No assurance can be given that the UK Sustainable Strategy will be successful. Investors can lose some or all of their capital invested. The UK Sustainable Strategy is subject to risks including: Emerging markets; ESG; Global Investments; Impact; Investments in small capitalisation and/or micro capitalisation universe and Investment in specific sectors or asset classes.
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