July 2010
June was another weak month for equity markets with the FTSE All-Share Index declining 4.6%
on a total return basis. It is worth pointing out that this headline number is disproportionately
affected by the 36% fall in the BP share price. Euro area debt concerns persisted, as investors
remained unconvinced that the policy response would address public finances without acting
as a brake on currently fragile economic growth. Measures taken by China to moderate its
property market served as a further drag on risk appetite. In addition, generally disappointing
economic data in the US reinforced growing worries regarding the sustainability of the
global recovery.
In the UK, the new Coalition Government announced its emergency budget which aims to
reduce net debt from 11% of GDP to 1.1% in 2015 largely through spending cuts. Interest
rates were yet again kept flat by the Bank of England, although the fact that one committee
member voted in favour of a 25bps rise points to mounting inflationary concerns of prolonged
monetary stimulus. Economic indicators were mixed. Both the manufacturing and services PMI
were encouraging, whilst industrial production disappointed and the labour market remains
weak. Elsewhere, in the US Q1 2010 GDP figures were revised downwards to 2.7% from an
initial 3.2% reading, May payroll figures were worse than expected and new home sales fell
33%. The main news coming out of the Euro area was that Spain would conduct banking stress
tests to address funding concerns while the ratings agency Moody’s downgraded Greece by
four notches to Ba1, signalling a lack of confidence in the EU/IMF bailout package.
Amidst a volatile market backdrop we took opportunities to add to holdings in Davis Service,
Close Brothers and Chaucer, all of which offer strong business models and attractive dividend
paying capacity. We topped up McBride following share price weakness and took profits in Weir
on strength. Positions in both Chloride and Arriva were exited following recommended bid
approaches. We wrote short dated calls against Prudential, AstraZeneca and Rio Tinto; whilst
writing puts against Persimmon and Tesco.
As stock pickers investing in companies rather than economies we have, on the whole, been
encouraged by current trading and the steps companies have taken to manage themselves
more efficiently. We believe that equity valuations are far from demanding though conditions
ahead are likely to be tough. We will continue to monitor our investments carefully and
make sure that the businesses we back can prosper with good quality business models, have
attractive geographic exposures and have the balance sheet to withstand future volatile
events. Post BP, we will continue to focus on maximising the dividend paying capability of the
investment portfolio.
Source: Monthly Factsheet Aberdeen Asset Managers Limited