October was a challenging month for UK equity markets. Growing local restrictions as a result of Covid-19, ongoing Brexit negotiations and the upcoming US election all added to uncertainty. In this context, among the best performers during the month was cycling/motor retailer Halfords, which has seen strong sales growth despite the pandemic as consumers seek an alternative to using public transport. The largest detractors from performance included small business insurer Hiscox, as there are concerns that forced business closures and further event cancellations could mean a repeat (albeit on a lesser scale) of the Covid-19 claims costs they incurred earlier this year.

During the month we exited two holdings we had been steadily reducing for some time, Avon Rubber (which produces defence equipment) and Croda (a speciality chemicals company), where the valuations had reached high levels versus history. We used the proceeds to add to two existing holdings, Tesco and GlaxoSmithKline. In both cases earnings expectations have been broadly unchanged since the beginning of 2020, therefore the fall in the share price has led to a material de-rating. Both pay an attractive dividend yield to shareholders.

November should provide clarity on some of the key overhangs currently in the market. For example it is likely we will see the first phase III trial data from Covid-19 vaccines (the results from Pfizer are expected imminently), the US election will take place, and as the year end approaches we will have greater clarity on the future trading relationship with the EU (where there does seem to be progress being made on the key issues). Therefore we could be approaching the point of ‘peak uncertainty’, with valuations remaining at low levels versus history for companies most impacted by the current restrictions on trading.

Glossary

Dividend yield: The income received on an investment relative to its price, expressed as a percentage. It enables comparisons of the level of income provided by different investments such as equities, bonds, cash or property, or between funds at a point in time