UK equities returned 1.2% in March as measured by the FTSE All Share Index. The return for the first quarter of 2017 was 4.0%. UK CPI inflation for the year to 28th February was announced to have risen to 2.3%. This was caused by the fall in sterling and the rise in commodity prices. Overseas, the US Federal Reserve raised its Federal Funds rate by 25bps to 1.0%.
The Trust’s largest holding, British American Tobacco, was a notable outperformer ahead of the closing of the deal to buy out the 57% that it does not already own of its US subsidiary Reynolds American. Energy providers SSE and Centrica, where the Trust is overweight relative to the market average, were underperformers on fears over UK government interference. However, both stocks have a broad range of utility activities and attractive dividend yields which we consider to be safe. A new holding was bought in Aviva which has good prospects from its spread of general and life insurance operations in the UK and overseas. A new holding was also purchased in DFS, the furniture retailer, on an attractive valuation and it subsequently announced a special dividend. The holding in Interserve, the support services group, was sold after its disappointing results and suspension of its dividend.
While there may be some pressure on UK consumers from rising inflation, exporters are benefiting from the fall in sterling and economic growth should be underpinned by low interest rates. Overseas, economic growth is picking up in Europe and continues in the US and Asia Pacific. Against this background, we are cautiously optimistic about the prospects for UK equities given the attractive dividend yields available.