Politics and geopolitical events continued to dominate investment markets in June. The trade dispute between the US and China continued to simmer, with President Trump meeting President Xi Jinping at the end of the month, although the US did back away from imposing additional tariffs on Mexico. There were increasing concerns that tariff increases are slowing world trade and threatening economic growth. Central banks were in sharp focus, with both the US Federal Reserve and the European Central Bank indicating that they may take action to help growth.

In the UK, the contest for Conservative party leader, and therefore Prime Minister, was whittled down to two; Boris Johnson and Jeremy Hunt. Boris Johnson started as the clear favourite among the Conservative party members, who make the decision, and he is standing on a commitment to deliver Brexit by 31 October 2019.

The stock market rose early in the month and then traded sideways on limited volatility. Over the month, the total return was 3.7%, bringing the return for the first six months of the calendar year to almost 13%. The best performing sectors were cyclical but globally exposed sectors, such as mining, electronic & electrical equipment and general industrials. The weakest sectors included domestic cyclical sectors like retail, real estate and housebuilders, as well as tobacco.

The portfolio return was in line with the index in June with the Trust’s NAV returning 4.3%. The biggest positive stock contributions came from copper miner Antofagasta, Standard Life Aberdeen and BAE Systems. All three shares produced total returns of 10% or above, recovering from prior weakness. The main negative stock contributions came from Keller, Imperial Brands and Senior, which underperformed the rising market.

Investment activity was limited in the month, which saw less volatility than in recent periods. We added to the Imperial Brands position as the shares continued to fall back, and offered exceptional value.

As we said last month, the UK stock market is polarised, with companies earning high returns on capital and those offering reliable or high growth, trading at unusually large premiums to the rest of the market. In this environment, we are able to find many sound businesses, with robust market positions and reasonable long term prospects, trading on low, or in some cases very depressed valuations. Sectors such as aerospace & defence, construction & building materials and life insurance have several companies that meet this description, and Merchants has a significant exposure to these industries, among others. By building a portfolio of shares in such companies, we believe that Merchants can continue to deliver a high and rising dividend yield and an attractive total return to shareholders in the medium term.