The UK equity market produced a total return of 2.8% in May as measured by the FTSE All Share Index. The main economic statistic of note was inflation for April which at 2.4% (CPI) came in slightly below expectations. This seemed to confirm the trend of slowing UK domestic economic growth. Nevertheless, the more domestic FTSE 250 Index of medium-sized companies returned 3.0% slightly outperforming the FTSE 100 Index, which returned 2.8% and is biased towards large, international companies.
Within the UK equity market, notably outperforming sectors were oil & gas and mining which are benefiting from strong commodity prices. City of London has large holdings in Royal Dutch Shell, BP, Rio Tinto and BHP Billiton but overall has below average exposure to the basic resources sectors. A notably underperforming area was fixed and mobile telecommunications where City of London has stakes in BT and Vodafone. Regulatory and competitive pressures have adversely affected returns although demand for telecommunications services grows robustly.
The most significant change for City of London in May was the sale of the holding in NEX which has agreed a takeover bid from CME of the US. The proceeds were reinvested across the portfolio.
It is still likely that the bank rate will increase from 0.5% to 0.75% during the second half of 2018 given fairly full employment and the advanced stage of the economic cycle. The dividend yield from UK equities remains attractive compared with the bank rate and the other main alternatives.
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