For the ninth month running, UK equities delivered a positive return, of 0.6% as measured by the FTSE All Share Index. The FTSE 100 Index of large companies returned 1.0% outperforming the more domestically focussed FTSE Mid 250 Index which produced a negative return of 1.7%. Sterling fell by 6.0% against the US dollar and 3.6% against the Euro with the Prime Minister’s speech at the Conservative Party Conference making a “hard Brexit” more likely.
Long-dated gilts fell and produced a negative return of 6.5%. This was helpful to the banks sector which was a notable outperformer. Although City of London is under represented compared with the market average in banks, HSBC was its third largest holding (at 31/10/16) and there were also positions in Lloyds and Barclays. A notable underperformer was the pharmaceutical sector partly on nervousness ahead of the US election and partly due to increased pressure on prices for medicines in some areas. City of London has below average exposure to this sector with its largest position being GlaxoSmithKline (11th largest holding at 31/10/16.)
During the month, some profits were taken in British American Tobacco, the Trust’s largest holding, which has performed well, with the proceeds reinvested in other opportunities. A new holding was bought in Innogy, which is a German listed utility with regulated and non-regulated operations. It offers a dependable dividend yield backed by high quality assets.
The result of the US presidential election is another surprise in a year of political surprises. Our interpretation is that the new President will be keen to boost growth to fulfil the hopes of his supporters. He will be aided by both houses of Congress being in Republican hands. To the extent that growth is better than previously expected, it should be positive for equities notwithstanding the many uncertainties. In the meantime, the dividend yield from UK equities remains attractive relative to the main alternatives.