The spread of the coronavirus from China to many other countries, including those as diverse as Italy, South Korea and Iran, weighed on markets in February. Economies were likely to be adversely affected by a drop in demand, especially travel related, as well as supply disruptions. The UK equity market, as measured by the FTSE All Share Index, produced a negative total return of 8.9%. The FTSE 100 Index of the largest companies slightly underperformed, with a negative total return of 9.0%, compared with the FTSE 250 Index of medium-sized companies which produced a negative total return of 8.5%. Government bond yields fell with the 10 Year Gilt yield ending the month at 0.4% indicating caution on growth prospects.

Utilities, which are largely unaffected by moves in economic activity, were among the best performers and City of London benefited from its stakes in SSE and National Grid. In contrast, the oil sector was an underperformer, reflecting the weak oil price. City of London has large holdings in Royal Dutch Shell and BP but is under represented relative to the size of those companies in the FTSE All Share Index. Within their global sector, both companies are, in our view, relatively well positioned given their integrated operations in refining and marketing as well as oil and gas production. During the month, additions were made to several of City of London’s existing stakes but there were no purchases of new holdings and no complete sales.

The policy response to the coronavirus has been robust with a 0.5% cut in interest rates in the US and the UK. In addition, the UK Budget set out an expanding deficit. Although there is bound to be short term share price volatility, UK equities continue to offer an attractive dividend yield relative to the main alternatives.