UK equities lost ground in August on fears that the ongoing programme of interest-rate rises could stifle domestic growth. Investors were also concernedabout reports of continued weakness in the Chinese economy and the consequent possibility of a global downturn. There was a partial recovery towards the end of the month as particularly weak private-sector data in Britain put pressure on the Bank of England (BoE) to rethink its plans for further rate hikes over the rest of the year. Overall, the blue-chip FTSE 100 Index made a total return of -2.6% while the mid-cap FTSE 250 Index fared only slightly better (-2.4%). The FTSE Small Cap Index, meanwhile, returned -2.9%. The BoE raised interest rates by 0.25% early in the month, taking the base rate to 5.25%. At the time, officials said they expected rates to rise to just over 6% in the medium term, although the market’s expectations of the UK base-rate peak declined over the course of the month. New data showed the inflation rate as measured by the Consumer Prices Index (CPI) had fallen to 6.8% in July, although core inflation, which excludes more volatile energy and food costs, held firm at 6.4%. Meanwhile, wage growth in the UK hit a record high. Figures published by S&P Global indicated that business output was falling at its fastest rate in more than two years, with performance in the manufacturing sector especially weak.
A fresh decline in mortgage approvals and property market activity hit firms in the construction industry, although housebuilders welcomed new government proposals to ease planning restrictions. Performance The Trust delivered a net asset value total return of -1.4% in August but outperformed the Numis Smaller Companies (excluding Investment Companies) Index, which returned -2.7%.
Shares in 4Imprint Group rose after the publication of a trading statement that showed last year’s impressive growth had continued into 2023. Meanwhile, our holdings in both Hollywood Bowl Group and Tatton Asset Management added to performance after the companies’ shares recovered from their July falls.
On the negative side, the Trust’s holding in Somero Enterprises detracted as the company’s shares declined. Greggs weighed on returns after a slowdown in like-for-like sales spooked investors. However, the company’s recent cost rises appear to be abating. DiscoverIE Group also underperformed despite issuing a trading statement that was in line with investor expectations. Activity We reduced the Trust’s holding in Mortgage Advice Bureau during the month.
Benchmark
Numis Smaller Companies ex Investment Trusts Index (from 1 January 2020). FTSE SmallCap (ex Investment Companies) Index total return (up to 31 December 2019).
Discrete Performance (%)
| 30/09/23 | 30/09/22 | 30/09/21 | 30/09/20 | 30/09/19 | |
| Share Price | 17.3 | (37.9) | 53.0 | (2.6) | 5.3 |
| NAV | 7.9 | (37.5) | 40.4 | (.04) | 0.9 |
| Benchmark | 11.8 | (25.1) | 45.9 | (10.5) | (7.8) |
Total return; NAV to NAV, net income reinvested, GBP. Share price total return is on a mid-to-mid basis. Dividend calculations are to reinvest as at the ex-dividend date. NAV returns based on NAVs with debt valued at fair value. Source: abrdn Investments Limited, Lipper and Morningstar. Past performance is not a guide to future results.
ESG Engagement
We met with the management team at infrastructure manufacturer Hill & Smith to discuss the company’s approach to environmental, social and governance issues. Sustainability is a structural growth driver for the business and it has established a commitment to be net zero for scope 1 and 2 emissions by 2040, and across the whole value chain by 2050. The company has continued to focus on local energy-saving initiatives as well as the refinement of its decarbonisation roadmap.
Outlook
We remain in an environment heavily influenced by macroeconomic conditions, with bond yields having been a key driver of market shape and direction in recent months. With essentially risk-free returns currently available at an attractive mid-single-digit level, the interest in equities continues to look challenging in the near term. August saw another sharp fall in CPI and inflation is now beginning to fall significantly. With base rates close to peaking, the economic context is changing. If we are indeed close to the peak in interest rates then the future looks better than the past for equities, in particular in the UK market where we are coming off inflation levels that have been higher than in many other major economies. The end of the tightening cycle will come as a relief and we feel this environment can be an attractive one for investors who are focused on stock picking, where earnings momentum becomes more of a driver of share prices.Easing yields and falling inflation should create conditions that are more favourable to quality/growth investment strategies than has been the case over the last 18 months. We have continued to see some strong market reactions to earnings momentum, with companies that have published earnings upgrades being rewarded and vice-versa.
This has also favoured a number of more cyclical names as well as those emerging from tough trading periods, where expectations are very low and the potential for a positive rebound – through earnings revisions and stock re-ratings – is large. Although the outlook for the UK economy remains uncertain while interest rates remain high, we believe quality companies will be sought after. Many of our holdings have low debt levels and some have net positive cash balance sheets: this should give them the confidence to continue investing in their businesses, either organically or through accretive bolt-on acquisitions.
Important information
Risk factors you should consider prior to investing:
- The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
- Past performance is not a guide to future results.
- Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
- The Company may borrow to finance further investment (gearing).
- The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
- The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
- The Company may charge expenses to capital which may erode the capital value of the investment.
- The Company invests in smaller companies which are likely to carry a higher degree of risk than larger companies.
- Derivatives may be used, subject to restrictions set out for the Company, in order to manage risk and generate income. The market in derivatives can be volatile and there is a higher than average risk of loss.
- There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
- As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
- Certain trusts may seek to invest in higher yielding securities such as bonds, which are subject to credit risk, market price risk and interest rate risk. Unlike income from a single bond, the level of income from an investment trust is not fixed and may fluctuate.
- With funds investing in bonds there is a risk that interest rate fluctuations could affect the capital value of investments.
· Where long term interest rates rise, the capital value of shares is likely to fall, and vice versa. In addition to the interest rate risk, bond investments are also exposed to credit risk reflecting the ability of the borrower (i.e. bond issuer) to meet its obligations (i.e. pay the interest on a bond and return the capital on the redemption date).
- The risk of this happening is usually higher with bonds classified as ‘subinvestment grade’. These may produce a higher level of income but at a higher risk than investments in ‘investment grade’ bonds.
- In turn, this may have an adverse impact on funds that invest in such bonds. Specialist funds which invest in small markets or sectors of industry are likely to be more volatile than more diversified trusts.
- Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.
Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London, EC2M 4AG. abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.