November was a very strong month for UK and global equity markets. This recovery in share prices was driven primarily by encouraging Covid-19 vaccine trial read-outs from Pfizer, Moderna and AstraZeneca. These trial read-outs have increased hopes that the domestic and global economy can begin to ‘re-open’ from spring 2021 onwards, with current social distancing requirements eased. For modestly cyclical businesses that have in many cases seen suppressed profits this year, this more visible path to ‘re-opening’ means shares can again be valued relative to historic profits (for example those generated in 2019), rather than subdued 2020 profits.
The best performing shares in the portfolio this month were predominantly companies positively exposed to increasing economic activity, such as industrial companies and financials. The other ‘theme’ among the best performers was corporate activity; in November we had two bids in the portfolio for RSA (an insurer) and Elementis (a speciality chemicals company). We find this encouraging as it helps to validate our view that UK companies continue to look attractively valued relative to global peers.
Among the main transactions during the month was selling the holding in RSA following the takeover offer and reallocating the proceeds among existing financials holdings including Natwest, Aviva and Lloyds. A new (small) position was added in BT, where the valuation is low relative to telecom peers.
Following the strength seen in share prices in November, the natural follow-up question is whether we still see scope for further upside across much of the portfolio. In many cases valuations are still lower than historic averages relative to 2019 earnings. We are therefore comfortable with current valuations, and in some cases think the amount of operational progress made by businesses is being underappreciated. Many businesses have taken the opportunity this year to substantially reduce costs (such as close manufacturing facilities) or invest in their online capability. If and when sales recover this could mean the scale of the earnings recovery is faster than some market participants are expecting.
Cyclical companies: Companies that sell discretionary consumer items, such as cars, or industries highly sensitive to changes in the economy, such as miners. The prices of equities and bonds issued by cyclical companies tend to be strongly affected by ups and downs in the overall economy, when compared to non-cyclical companies.