February 2010
UK equities were weaker during January in common with the majority of markets around the world. Reacting to a variety of negative news flow, the FTSE All-Share Index retreated 3.6% following an initially encouraging start to the month. President Obama’s proposed banking reforms caused financial stocks to fall. Renewed fears surrounding Greece’s ability to address its ballooning budget deficit emerged and served to destabilise confidence. In addition, steps taken by the Chinese authorities to curb bank lending further fuelled concerns at a time when the sustainability of the global recovery remains firmly in focus. Commodity related stocks were weaker as a result.
The UK continues to lag its peers with the domestic economy officially emerging from recession in the final quarter of 2009 as GDP expanded a sluggish 0.1%. The Monetary Policy Committee opted to maintain the level of quantitative easing at £200 billion and held interest rates at 0.5%, the longer term inflationary implications of which continue to be debated.
Economic news flow elsewhere was mixed. US employment data disappointed although the unemployment outlook became more favourable. In Europe, manufacturing indicators improved but the health of the services sector appeared weaker than expected. More generally, despite the huge amount of fiscal and monetary support injected to aid recovery, money supply growth and consumer spending remain weak in many Western economies including the UK. This reflects a cautious lending environment and ongoing de-leveraging to address unsustainably high levels of private sector debt. Improving corporate profitability offers some
hope but it is unclear whether this will drive investment to sufficient levels to mitigate subdued consumer demand and a looming fiscal squeeze.
In portfolio activity, we took profits following relative outperformance in Millennium & Copthorne, McBride and XP Power. The latter two names have delivered particularly strong capital returns over the past year in common with many of their smaller company peers.
Holdings in Holidaybreak and Provident Financial were added to, each of which offers an above-market yield. We wrote puts against Aviva and Vodafone, as well as raising our holding in the latter, and wrote calls against Rolls-Royce and AB Foods. Our focus remains on investing in high quality businesses with attractive prospects and valuations
Source: Monthly Factsheet Aberdeen Asset Managers Limited