August saw confirmation that the UK economy had officially entered recession earlier this year, with a record 20% fall in economic output recorded in the second quarter as many activities were halted under lockdown. However, there were also the first signs of a sharp economic rebound emerging from the depressed level, with June’s manufacturing production up over 10% compared to May and construction output up over 20%.

The stock market was less volatile in August than earlier in the year and registered a small gain, although most overseas stock markets were much stronger. Bond markets were weaker with the yield on the 10-year UK gilt trebling to 0.3% from its depressed level at the end of July. This resulted from hopes for improving economic activity, as well as comments from the chairman of the US Federal Reserve Board that they would target “average inflation” of 2% and allow inflation to run above their target level for some time.

The FTSE All-Share Index gave a total return of 2.4% in August, led by medium sized and smaller companies and several cyclical sectors. Among the larger sectors the strongest performers included travel & leisure, general retail and media. The weakest performing sectors produced negative returns and these tended to be defensive sectors including beverages, utilities and pharmaceuticals.

The portfolio outperformed the overall market benefitting from double digit gains at WPP, which announced a resumption of dividend payments along with reassuring results, GVC, which reported robust trading, and Inchcape, which benefitted from improving confidence as the automotive industry emerges from lockdown. Not owning Diageo also helped relative performance as that share fell back, and held back the index return, in response to poor trading news. On the other hand, utilities SSE and National Grid were poor performers. National Express disappointed the market with results and Hammerson fell back as it announced a rights issue and an asset disposal to shore up the balance sheet. The NAV also outperformed the benchmark, returning 3.2%, ahead of the 2.4% return of the benchmark

Investment activity was more limited in August. We reduced positions in two stocks, Standard Life Aberdeen and St James’s Place, which both have high sensitivity to market levels. Both have outperformed the broader UK stock market over the last 12 months and it seemed prudent to reduce large exposures to fund other investments.

We added to BAE Systems after the company announced robust interim results in July and reinstated its 2019 dividend, which had been deferred earlier in the year. The shares were trading on a very modest multiple, which we believe undervalues their defensive characteristics. We also added a small amount to several existing positions that have underperformed and trade on very depressed valuations. The most significant was housebuilder Redrow, where we are encouraged by reports of strong demand and robust pricing for new homes as the industry emerges from lockdown.

As we have noted several times, the stock market has been very polarised for some time now with a large gap between perceived quality and growth companies and many of the other companies. We find many compelling investment opportunities to buy fundamentally sound businesses trading on exceptionally low valuations, assuming quite a cautious economic scenario. We have actually been encouraged by the speed of recovery in several of the industries that the portfolio is exposed to such as housebuilding, construction, furniture retail, car sales, gambling and advertising. In some cases we are also seeing the reinstatement of dividends that had previously been deferred, or the resumption of dividend payments as at WPP this month.