The key market event in December was the UK general election on 12^th December, at which Boris Johnson’s Conservative party secured a convincing victory and a majority of 80 seats. This will allow him to push his EU Withdrawal Bill through parliament, so that the UK can leave the European Union at the end of January 2020. This result lifted sentiment towards UK assets, with the pound and stock markets both rallying. There were two main reasons for this response. Firstly, there is now more clarity on the Brexit process which has been mired in uncertainty since June 2016’s referendum. This should allow businesses and consumers to plan with a bit more certainty, although the future trading arrangements with the EU are yet to be agreed. Secondly, Jeremy Corbyn’s Labour party performed poorly in the election. Investors had been nervous about their fairly radical left wing agenda, which included nationalisations, higher business taxation and a substantial increase in public spending. With a clear majority in Parliament, the Conservatives can now pursue a more market friendly agenda, which had been difficult under the previous gridlock.

There were also positive developments in the ongoing trade dispute between the USA and China, with the USA agreeing to roll back certain tariffs and China agreeing to purchase specific US goods and services as well as agreeing to structural reforms.

The stock market had a strong finish to a strong year, with a 3.3% total return on the FTSE All-Share index. Medium and smaller sized companies, which tend to be more domestically exposed, outperformed, reacting to the election result. The best performing sectors included utilities, as the possibility of renationalisation receded, and several of the more cyclical and financial sectors, as well as tobacco. The weakest sectors included defensive industries like mobile communications, aerospace & defence, oil & gas producers and beverages.

The portfolio outperformed the stock market, driven by double digit total returns from a number of medium and smaller sized companies, such as Balfour Beatty, Keller, Bovis Homes and Pennon. There were fewer negative contributors, but BAE Systems, Senior and National Express underperformed. The Trust’s NAV consequently rose by 6.9% in December, well ahead of the benchmark return of 3.3%.

We made a new small investment in Norcros, which designs, manufactures and sells showers, taps, tiles, adhesives and other bathroom related products in the UK and South Africa. Key brands include Triton, the UK market leader in electric showers, Vado taps and Johnson Tiles. In recent years the business has been built by acquisitions of businesses selling complementary products, enabling the company to benefit from sharing overheads and cross-selling. The company has a strong record of earnings and dividend growth, helped by market share gains, as they have shifted the business mix from DIY towards trade suppliers and large housebuilders. However, like many smaller UK companies exposed to the domestic consumer, the shares have been out of favour and traded on a very lowly valuation. We thought that the low valuation did not reflect the favourable prospects for the business, even allowing for a large pension liability.

We sold the remaining holding in TP ICAP, the financial trading company, which performed well in 2019 and became fully valued. Elsewhere, we continued to add to attractively priced shares like Stock Spirits and PZ Cussons and we made small reductions to some of the domestic and financial stocks that had a strong rally into and after the general election, such as Legal & General, Standard Life Aberdeen and Bovis Homes.

As we enter 2020, some of the political uncertainty that has plagued the UK since the Brexit referendum in June 2016, has been removed. We now have a government with a clear majority and a much clearer path towards Brexit at the end of this month, although the important issue of the future trading relationship between the UK and EU remains unclear and could lead to volatility in the months ahead. We should be entering a more normal period for equity investors. The fundamental qualities of companies, such as the strength of their competitive positions and their growth prospects, should matter more than whether they are domestic or internationally focused, and whether they are large or small. This should be a good environment for stock picking. The portfolio comprises many strong businesses, paying high and growing dividends, in aggregate, and trading on attractive valuations.