Following December’s sharp rise, the UK equity market, as measured by the FTSE All Share Index, produced a negative return of 0.3% in January. Overall, expectations for economic growth rose both in the UK and overseas. The mining sector was the strongest performing sector with a return of 13.5%. City of London holds Rio Tinto and BHP Billiton in its portfolio but is under represented relative to the market average in this volatile sector where there have been many dividend cuts in recent years. Among domestic cyclicals, housebuilders were a notable outperformer and the Fund benefited from its overweight position.
Defensive sectors tended to underperform and the worst performing sector was fixed line telecoms. BT, which is held in the City of London’s portfolio, had a profits warning but reaffirmed its commitment to 10% dividend growth over the next two years.
In the pharmaceutical sector, the holding in Bristol Myers Squibb of the US was sold after disappointing news about its new medicines in research and development. However, holdings are retained in Merck of the US, which is leading in the new generation of cancer drugs, and also in GlaxoSmithKline and AstraZeneca in the UK.
The dividend yield from UK equities remains attractive relative to the main alternatives. If market expectations for economic growth are correct, equities should be a natural beneficiary as profits and dividends rise.