15 January 2020
The first December election in nearly a century led to a bigger than expected victory for the Conservative party. Sterling rose as Boris Johnson delivered a majority that will enable the Tories to pass Brexit legislation without relying on either the no-deal ERG fringe or making further concessions to Remainers. The markets continued in much the same vein as November, with the midcap index outperforming and an aversion maintained to less liquid stocks.
It’s expected that the election result and the breaking of the near-term Brexit deadlock will lead investment committees sitting at pension funds and insurance houses to reweight their equity allocations to the UK market. This means that despite rallies, especially in domestic names, continued demand may drive markets higher. How long-lived this proves to be is another question. The Conservatives have passed a law to express their determination that Britain will not ask for an extension to the Transition Period which ends on 31stDecember 2020. This potentially brings about another cliff-edge scenario that would alarm investors in UK assets.
How much of Britain’s future can be shaped by its domestic agenda is up for debate, given the uncertainty of our future trading relationships. However, domestic stocks seem to be set fair because of increasing real wages, high levels of employment, promises of government spending, and the ‘end of austerity’. The way households spend is changing, from bricks and mortar retail to online, discounters and more leisure spend. If Dominic Cummings has his way civil service spending will become more efficient, effective and accountable. Recent announcements also imply a willingness to make up for shortfalls in academic institutions’ research budgets caused by Brexit.
This being an election year in the US makes a trade war truce between Trump and Xi’s more likely, and this bodes well for the US consumer if tariff cuts feed into lower prices. China welcomed in 2020 with a further cut to its reserve requirement ratio for banks which shows a willingness to address declining growth rates. Lagarde, the new head of the ECB, has also talked about further liquidity easing in Europe. Whilst we are in the eleventh year of an equity bull market, we do see some selective opportunities, particularly set against fixed income valuations. We are also aware that private equity has $2.5trn sitting in cash looking for deployment, and some stocks have attractive free cash flow yields.
The fund returned 7.5% in December, just slightly ahead of the benchmark which rose 7.3%. This brings 2019 performance to 30.4%, 8.2% ahead of the benchmark which rose 22.2%. Jadestone and Petrotal, both oil producers, benefitted from the strong commodity price, but also produced very strong operational results. Domestic names bounced strongly on the election news, with OneSavingsBank, Hollywood Bowl, MJ Gleeson, Redrow, and Countryside all among the top performers. We took a position in Pebble Group which floated in early December. The company operates in the same kind of area as 4imprint, but targets large as well as SME companies, and the model for SME promotional products is different. Promotional Merchandise accounts for 10% ($50bn) of global advertising and still grows, as it provides a very good value, cost per impression metric. Management came across well in our meeting and they have a strong position in a highly fragmented market. Shares have risen 30% since IPO. In a strong month, there were few detractors. Block Energy’s weakness continued given operational difficulties in West Rustavi, Georgia. Scapa continued to make little progress and we sold out of our position in December.
The VCT rose by 3.5%, lagging the benchmark which was up by 4.2% during the month. Over 2019, the VCT has returned 20.5%, outperforming the Numis Alternative Markets Index by 5.8%.
A stellar performer over the year, AB Dynamics retreated from its highs and this was the biggest negative contributor to performance. We had trimmed our position in AB Dynamics over the summer months, given the share price appreciation. It has been a lone star in a sector troubled by falling car sales and more stringent emissions legislation. Learning Technologies Group, GB Group and Ideagen were all significant contributors to performance, as globally the tech sector finished the year strongly. Ixico rose over 30% this month on good numbers. Investor patience is finally being rewarded. Since October the share price been buoyed by a string of positive company news regarding contract wins and extensions. While encouraging drug development news from customers also added to the story.