The UK Prime Minister, Theresa May, unveiled a White Paper on the UK’s future relationship with the European Union, which was widely seen as heading towards a “softer” Brexit than the previous government position. In the process, the Brexit Secretary, David Davies, and Foreign Secretary, Boris Johnson, both resigned from their cabinet posts in disagreement. However, this did not end the uncertainty over Brexit, as it remains unclear whether the EU will accept key parts of the White Paper.

The stock market was not particularly affected by these machinations, but reacted more to developing trade tensions between the United States and China. Overall, the market produced a small positive return over the month. Many of the defensive sectors, like tobacco, pharmaceuticals and fixed line telecommunications were the best performers. However there were also some poor performing defensive sectors, including food producers and utilities, as well as more cyclical sectors, such as software and mining.

The Trust’s NAV rose by +0.91% in July, behind the benchmark return of +1.29%. The biggest impact came from TP ICAP, a broking company, where the shares fell sharply as the company warned about additional costs next year and reduced guidance for the synergy benefits from its recent merger. The company also announced the departure of its Chief Executive Officer. Elsewhere, not owning British American Tobacco and AstraZeneca negatively impacted performance as both shares were strong performers. On the other hand, the industrial companies Meggitt and Morgan Advanced Materials were strong performers on encouraging interim results announcements. Also, the gambling company GVC rallied after announcing a pioneering joint venture with a leading US casino company MGM Resorts, to exploit the deregulating US gambling industry.

There were some encouraging dividend announcements from companies within the Merchants portfolio in July. Oil major BP announced its first dividend increase since 2014. Whilst this was only a small increase, it was particularly notable given market concerns about the sustainability of dividends from the oil majors as recently as 2016. IG Group raised its full year dividend by 34%, in line with earnings growth, even though the company faces a more difficult year in 2019 as new regulations take effect. On 1^st August, St James’s Place announced a 20% increase in its interim dividend as the business continues to report strong growth in assets and cash flows.

We added one new company to the portfolio. Keller is the world leader in geotechnical engineering (ground engineering), with roughly a 10% share of this fragmented market. We believe the industry has structural growth opportunities, as rising city populations and ageing infrastructure around the world create increasing demand for complex underground structures and strong foundations for tall buildings and other large structures. Despite a good long term growth record, the company’s shares were trading on a low valuation, possibly suffering from a UK discount, despite the fact that less than 5% of sales come from the UK.

We continued to add to shares on low valuations, typically after a period of poor performance, such as Standard Life Aberdeen, Greene King, TP ICAP and ITV. Elsewhere, we significantly reduced our Informa shareholding which was inherited from the UBM takeover, primarily on valuation grounds. We also further reduced the exposure to Royal Dutch Shell after substantial gains in the last two years.

The recent interim results season has seen most of Merchants’ portfolio companies reporting solid trading results and robust dividend payments, with few significant disappointments. From oil and mining to pharmaceuticals and financial services, the portfolio is broadly diversified both by industry and by geographic exposure. We continue to focus on higher yielding companies with strong business franchises, trading on attractive valuations. We can find many such investment opportunities in the UK stock market at present and we remain optimistic that the portfolio can continue to deliver a high and growing income stream, and good total returns, in line with The Merchant Trust’s objectives.

Side Comment

I have recently read the excellent ‘Prisoners of Geography. Ten maps that tell you everything you need to know about global politics’, by journalist Tim Marshall. This book explains how the geography of regions, including mountains, rivers, forests and deserts has helped shape the borders of countries, and why certain areas are strategically important. For example, Tibet contains important sources for three of China’s great rivers, so the region is critically important for that country’s national water security. Similarly, the Russian naval ports in the Crimea are their only warm water ports, that do not freeze in winter, which helps explain the Russian response to secure the region, as Ukraine attempted to move closer to the EU and western governments.