During February, there was a notable increase in volatility across world equity markets, probably due to the rise in bond yields in the US in previous months and the expectation of further increases in interest rates. In the UK, CPI inflation of 3.0% was slightly above consensus forecasts. The UK equity market produced a negative return of 3.3%, as measured by the FTSE All Share Index. Notably underperforming sectors were those with stable earnings and often considered a proxy for bonds, such as Tobacco and Utilities, where City of London is over represented relative to the market average.
On the other hand, the Industrial Transportation sector was a notable outperformer due to the resolution of the industrial action at Royal Mail, in which City of London has a stake. The Media sector was another outperformer due to a further takeover bid at Sky. Overall, the medium-sized company index, the FTSE 250, which has less exposure to bond proxy sectors, slightly outperformed with a negative return of 2.7%, compared with a negative return of 3.3% for the FTSE 100 Index of the largest companies.
During the month, additions were made to some existing holdings in City of London’s portfolio where decent dividend increases had been announced, such as miner BHP Billiton and Direct Line Insurance. In contrast, US utility Duke was sold on concern about its need for additional equity.
The perception of further monetary tightening from central banks is a function of the robust economic growth currently being experienced by the world economy. Against this background, companies should be able to continue to grow their profits and dividends. The dividend yield from UK equities remains attractive relative to the main alternatives.