UK equities produced a total return of 1.9% in October, as measured by the FTSE All Share Index. The FTSE 100 Index of the largest companies produced a total return of 1.8%, slightly behind the FTSE Mid 250 Index of more domestically focussed medium-sized companies, which produced a total return of 2.0%.
Reflecting global economic growth, commodity prices were strong with oil up 7.2% and copper up 6.0%. Discipline in allocating capital expenditure from oil and mining companies has led to a reduction in new supply coming onto the market. An addition was made to the Trust’s large holding in Royal Dutch Shell where confidence has grown in the sustainability of its dividend with the higher oil price and after it has significantly cut costs. The Trust’s holding in BHP Billiton was also added to because it appears significantly undervalued at the current level of commodity prices and offers an attractive dividend yield.
Defensive sectors, including utilities, pharmaceuticals and telecoms, underperformed. The imminence of a rise in UK interest rates had a negative effect on some of these sectors which are considered “bond proxies.” A reduction was made in the Trust’s holding in United Utilities given indications that the next water sector regulatory review will be tough.
The housebuilding sector had another strong month. Some profits were taken in Berkeley Group which is focussed on the London residential market where house prices have been falling.
The growth being experienced from the main economies of the world, including the UK, is positive for corporate profits. The dividend yield from UK equities remains attractive relative to the main alternatives.
Bond proxy: An equity perceived to pay safe and predictable income with low volatility – characteristics that are more commonly associated with bonds. They are typically drawn from the utility, consumer staple and pharmaceutical sectors. They might be added to a portfolio to imitate bonds, hence their name.