Global equities spent most of April going sideways, but finished the month on a strong note after the first round of the French presidential election increased the probability of a pro-Europe outcome.
European equities performed the best, buoyed by further signs of improvement in the Eurozone economy, with emerging market equities a close second. This was positive for the portfolio, which is overweight both.
In the US, economic activity slowed to an annualized rate of 0.7%, down from 2.1% in the previous quarter and the slowest quarterly reading in three years. UK economic growth also slowed in the first quarter, recording its lowest quarterly gain in a year, due to lower consumer spending. In contrast, euro-zone data releases signalled that economic activity was near a six-year high.
The US dollar weakened over April, as investors anticipated that recent weaker-than-forecast economic data would prompt the Fed to keep rates on hold in June. In contrast, the euro and British pound strengthened, helped primarily by political developments.
The Trust’s NAV returned -0.9% against the benchmark return of -1.4%. The portfolio also outperformed the benchmark in April, with stock selection as the main driver. The overweight and stock selection in Industrials had the most positive impact to performance, with Balfour Beatty, Senior, Howden Joinery Group and Tyman among the top contributors. Stock selection in Financials was also positive and, from a country perspective, stock selection in the US and UK helped.
Equiniti Group was the top contributor after the company delivered positive FY17 results in line with expectations. The company has added a number of new clients as well as retaining all of its existing mandates. Although these new accounts are likely to make a limited contribution in the current year, the potential upside from cross-selling should support growth in the medium term. We also believe Equiniti can continue to deliver good growth through its shift to margin-accretive software solution revenues despite nearterm macro headwinds affecting organic growth.
We reduced our exposure to the Energy sector in the first quarter and the underweight in the sector was positive to performance in April. EOG Resources detracted, reflecting the overall fall in oil prices. While rising tensions in the Middle East helped oil prices to strengthen at the beginning of April, higher US inventories later caused them to retreat once more, with West Texas Intermediate ending the month back below USD 50 a barrel. EOG has grown mostly through internally generated projects over the last 5 years, only recently announcing their acquisition of Yates Petroleum. Given the potential of its portfolio, we still see EOG as a compelling investment.
Expectations of continued economic growth and rising inflation should support equities. However, the inflationary effect from the year-on-year increase in oil prices is likely to peter out and growth is unlikely to accelerate in the coming months. Equity prices should be more muted, particularly since valuations appear stretched in some markets and political uncertainty continues.
US equity prices are supported by healthy macro data, particularly for the labour market. However, the economic cycle is already at an advanced stage. In the euro area, the economic recovery is continuing despite political challenges.
Overall, sentiment indicators point to a solid expansion in the second quarter. However, the probability of further positive surprises is declining. The emerging markets look set to experience a moderate pick-up in growth thanks to still loose monetary and fiscal policies in China and the economic stabilisation in Brazil and Russia.
Our investment approach of investing in high return, reasonably valued, secular growth companies that can sustainably grow earnings and dividends remains well-placed to generate long-term outperformance.
For the latest portfolio breakdown, performance, dividend information, please visit www.brunner.co.uk.
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