The FTSE 100 started the April trading around the 6,140 level and reached an intra-month high of 6,410 before sliding to close out the month at 6,240 and conditions have been relatively stable when compared to recent market movements. Perhaps more significantly, however, there has been a continuation of the tail off in volume that started in earnest back in March with fewer than 700m FTSE 100 shares traded daily through the LSE on a number of occasions in contrast to the average daily volume over the last 12 months of nearer 800m shares. This is rather surprising- we would usually expect to see volume increasing into May, when traditionally a number of market participants go on (a seemingly extended) holiday.
The degree of uncertainty surrounding the outcome of the forthcoming Brexit referendum is such that it would appear that most are "sitting on their hands" until such a time as the implications of the outcome are known. As it stands the bookies are implying that there is about a 33% chance of the UK leaving the EU, although this is a volatile number and, as ever, may be inaccurate. So with corporations and investors feeling short to medium term uncertainty it is perhaps unsurprising that domestic equities have been somewhat listless and without meaningful direction.
Nevertheless we are in the process of raising cash from UK equity (following guidance from the Asset Allocation Committee and as stated in the previous monthly commentary) and as such have taken advantage of recent market strength to sell down certain holdings. These will be detailed in full later in the piece. To reiterate what has previously been said taking this action is not in response to the June 23rd referendum and instead is reflective of what we consider to be the unsustainable way in which the FTSE 100 rallied in Q1, driven largely by what we deem to be a short term recovery in energy and commodity markets. This has also coincided with our outlook on domestic housebuilders deteriorating somewhat (purely on the basis of valuation) and so as last month we have been fairly active at portfolio level.
In the wider world there have been some disappointing economic figures from the US (although equities remain seemingly fully valued and historically high) while in Japan the lack of further stimulus came as a negative surprise to markets. Chinese economic data still lacks the veracity of its developed market counterparts although recent currency fluctuations imply that policy makers are
seeking to take accommodative action. Meanwhile in Europe political schisms widen and Greek debt woes are due to re-surface imminently.
Closer to home there have been eye catching business failures in the shape of BHS and Austin Reed. At this stage our analysis is that neither event is indicative of diminishing health of the consumer, and instead more accurately reflects that neither company was able to compete in a fast changing market place: we therefore maintain our positive outlook for domestic consumer spending.
Finally at portfolio level we have undertaken several large scale disposals in Dart Group, Persimmon, Crest Nicholson, Rio Tinto and Menzies (John). These have been partial sales (profit taking) and as such positions in these names have been retained at portfolio level. In addition to this we have sold WPP based on valuation and outlook. We have also been active on the purchasing side, and have bought Pennon Group, Galliford Try, HSBC, Cello Group, Ashtead, Dunelm, Pets at Home, Devro, Safestyle, Smith & Nephew, British American Tobacco, St Ives, Alliance Pharma, Marston’s, Vertu Motors, AstraZeneca, NCC and Consort Medical. It is perhaps worth mentioning that these purchases were smaller scale than the preceding sales. In addition the purchase of St Ives followed a surprise mark down in terms of future earnings on the basis of contract cancellation which was badly received by the market. This stock was widely held and as such the subsequent drop in value will have had an adverse impact on portfolio performance albeit with the caveat that holdings in the company tended to be relatively minor.
Finally we have had a number of recent enquiries about our view on energy and commodity markets. In general terms we feel that the recent rally is likely to be temporary and note that valuations remain elevated. Recent data compiled by the CIT shows that 10 year forward PE ratios in both the Oil & Gas and Basic Materials sectors are at historic highs. To put that into context BP is currently trading on a multiple of more than 40 times December 2016 forecast earnings. This would imply that in order for BP to trade at the historical sector average of 10 times earnings either the price of oil will need to increase dramatically or the share price will need to retrace. Food for thought perhaps…
Anyway, that’s it for now, apologies for the delay in sending this monthly commentary and a belated hello to our new readers.
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