18 October 2022
For those who felt that markets, buffeted by events such Brexit, Covid and Russia’s invasion of Ukraine, had suffered enough, September 2022 managed to deliver yet more drama, of a particularly British nature. The long Conservative leadership contest came to an end and Liz Truss took the reins on 6th September, two days before the death of the Queen. After the period of national mourning, the new government’s policy announcements began. It was Kwasi Kwarteng, our new Chancellor of the Exchequer’s, ‘fiscal event’ on 23rd September that shook markets and led to some extraordinary moves in gilts, Sterling and stocks. Volatility has persisted. Borrowing costs have increased rapidly and the first and second order effects of this are still being absorbed by investors.
Markets have shown their ability to influence government policy since the period end, which is in some sense providing stability in the very short term. However, the credibility of the UK government is severely damaged. The Bank of England’s policy of yield curve control through bond purchases has been effective although in its current form it is due to end on 14th October.
Post-pandemic inflation means global rate expectations have risen sharply and geo-political concerns have added to nervousness. Sterling has fallen around 20% this year against the dollar and UK valuations are materially below both historical valuations and other developed markets. Work by Panmure Gordon highlights that 40% of UK companies have a Price to Earnings ratio of less than nine times, compared to an average of just 15% of companies over the last decade. However, it is not in this area where we are seeing bids for UK assets. Both corporate and private equity acquirers have been seeking high quality names with recurring revenues and overseas earnings, with commensurately higher multiples. Companies with these attributes are well represented in our funds.
The natural gas price has fallen since the EU completed its storage programmes for the winter months, ahead of the NordStream pipelines being blown up. Gas supplies will become a severe problem if there is a cold winter, and a bigger crisis may be brewing for next winter, as Europe must then rely even further on LNG supplies to replenish its gas storage, competing against a potentially resurgent Chinese economy, as Xi’s third term may presage an exit from strict Covid 19 lockdowns. However, many commentators still see inflation peaking, and unemployment remains mercifully low in the UK and elsewhere. It is now very much for the new Government to prove that they can calm the fears of the bond markets over the coming weeks.
TB Amati UK Listed Smaller Companies Fund
The TB Amati UK Listed Smaller Companies Fund fell by 7.42% against the benchmark which fell by 7.75%.
Technology stocks led the risers, with good numbers from Craneware leading to shares rising 22%. The company seems well placed to weather macroeconomic storms. It provides hospital management software to around 40% of US hospital groups, and a significant proportion of revenues are annual recurring revenues. Craneware helps hospitals and other healthcare providers navigate the new complexities of ‘value based’ healthcare through their Trisus platform and software solutions. The company has delivered earnings upgrades since their acquisition of Sentry Data Systems last year, which gave them reach into more hospitals and pharmacies and provided them with further solutions to simplify pharmacy procurement and compliance.
GTCR, a midsize US Private Equity house, confirmed it was considering a bid for GB Group however has decided not to go ahead since the period end. Other potential candidates also rose over the month, such as NCC Group, which also delivered reassuring results.
The statement by the Chancellor led to considerable falls in stocks that are seen as having interest rate sensitivity. For us, this meant shares in OSB Group, Vistry Group, CLS Holdings, Watkin Jones, Grainger and Mortgage Advice Bureau fell, and we reduced position sizes in some of these to reflect the heightened uncertainty.
Rising mortgage rates mean that any reprieve over household utility bills will be diminished for the millions of households that need to re-mortgage over the next few months. Two-year fixed rates, available at 2% a year ago, are now being offered closer to 6%. This will have a wide range of impacts across the economy. The best businesses will be able to take market share in the tougher conditions, while the weaker ones will find life difficult.
Amati AIM VCT
The Amati AIM VCT fell by 6.29% against the Numis Alternative Markets index which fell by 8.58%.
The biggest detractor from performance was Polarean Imaging. The company was due to receive an FDA decision on their application on September 30th. However, the company was given a 90-day extension. This is to allow the agency time to review the answers to additional questions. These are directed at Linde, the contract manufacturer of the xenon-129 gas, which is used during Polarean’s MRI imaging process. No further questions need to be addressed by Polarean and no further clinical trials are needed, and cash balances as of June were $22.7m. While clearly a disappointing development, the highly experienced contract manufacturing partner has assumed full responsibility and is working to address the FDA’s questions in a timely manner.
In terms of positive contributors, GTCR, a midsize US Private Equity house, confirmed it was considering a bid for GB Group however has decided not to go ahead since the period end. Maxcyte has continued to perform well unveiling a new up-scaled state of the art manufacturing headquarters and an additional partner announced a trial using their technology, which should trigger a milestone payment.
Craneware had results and showed it is well placed to weather macroeconomic storms. The company has delivered earnings upgrades since their acquisition of Sentry Data Systems last year, which gave them reach into more hospitals and pharmacies and provided them with further solutions to simplify pharmacy procurement and compliance.
We added a new holding early in the month as we bought Aurrigo shares at their IPO. The company has used its expertise gleaned from 30 years of auto engineering design and supply logistics to develop autonomous technology. This includes software modules, a cyber secure management platform and some vehicle designs, principally the Auto-Dolly to move around airport aprons for baggage handling. The fundraise is to develop the product set in vehicle design and security.