18 June 2019
“Sell in May” seems to have been the characteristic of sentiment for the past month, as the first prolonged weakness of 2019 hit markets. It is difficult to identify a specific catalyst from the many concerns facing investors. Pertinent, however, is the fact that the UK rebound has been driven by rising earnings multiples and not forecast upgrades. A more expensive market does not sit easily with the continued uncertainty surrounding softening economic indicators (mainly in China), aggressive trade war exchanges and political insecurity. As we have previously mentioned, there has also been a degree of market tension arising from the recent simultaneous strength of equities and bonds. May’s sell-off, however, has happened alongside a decline in government bond yields, suggesting that pessimism about growth is now the dominant view, perhaps driven by recent cautious comment from central banks.
With macro-political uncertainties being played out on a global stage, the coming months will likely involve further market volatility, requiring a delicate balancing of domestic and international exposures within portfolios. The fund fell 0.7% in the month, compared to a benchmark decline of 0.9%. Significant positive contributions came from mezzanine finance specialist, Intermediate Capital, which announced strong full year results with assets under management growing close to 30%. Online musical instrument and accessories retailer, Gear4music, rebounded from recent weakness with the shares gaining 27%, whilst VOIP and cloud telecoms services specialist, Gamma Communications, and computer gaming outsourcer, Keywords Studios, continued to enjoy investor support. UK oil and gas producer, Hurricane Energy, gained 23% after announcing first production from its Lancaster field in the North Sea. Major detractors from performance included adhesive products manufacturer, Scapa, which fell 26% after announcing the surprise departure of its chief executive –a decision now reversed in June in response to the company losing a major contract. Challenger bank, One Savings, saw some share weakness after a strong run, as did consumer goods retailer, B&M, and home credit provider, Morses Club, following their full year results which mentioned challenging market conditions. Microelectronics manufacturer, XP Power, was also weak on concerns about the impact of rising tariffs on Chinese trade.
During the month new positions were taken in Georgian oil and gas producer, Block Energy, meat supplier and processor, Cranswick, and foreign exchange payments platform provider, FairFX(already held in the Amati AIM VCT). Positions in Lloyds insurer, Hiscox, and specialist annuity provider, Just Group, were sold.
Year to date, the index of the 50 largest stocks on AIM has risen 18.5%, compared to a main market gain of 6.7%. Contributing to this outperformance has been the ability of some large AIM constituents to continue reporting strong earnings progression, including a number of holdings within the Amati AIM VCT portfolio. Against a benchmark fall of 0.2% for the month, the VCT returned 0.8%. The most significant contributors included specialist automotive engineer, AB Dynamics, which announced a well oversubscribed placing to fund future growth plans and potential acquisitions. Computer games developer, Frontier Developments, outsourced services provider, Keyword Studios,and US healthcare billing software specialist, Craneware, all continued to show share price momentum following recent results. The main detractor from performance was Georgian oil and gas producer, Block Energy, which gave back some of its recent gains on the announcement of a discounted placing to provide substantial funding for the development of its West Rustavi well, which recently gave promising flow rate results.
There was also some weakness from compliance and governance software provider, Ideagen, despite there being no underlying news flow. Some profits were taken in AB Dynamics during May, adding to similar trimmings in recent months, as the holding had become a significant proportion of the overall portfolio.