The coronavirus pandemic dominated news flow for financial markets, as it had done for much of 2020. Early in the month, the UK became the first country to approve the Pfizer / BioNTech vaccine and the first Western country to begin vaccinating people. This provided a further sentiment boost to stock markets, following news of successful trial results in November. However, rising infection rates in the UK and the discovery of a new, more contagious strain of the virus, led to increasing restrictions on activity and a very subdued festive season. This provided a reminder of the very real health and economic costs of the pandemic.

The other major event in the UK, was the signing of a Brexit trade and cooperation agreement with the EU after many months of difficult negotiations. Investors generally welcomed the deal, which allows for tariff and quota free trade in goods between the UK and EU, and also covers many other areas, including security, transport, telecommunications and energy. There had been fears, right up until the final few days, that the UK would exit the transition period at the end of December, without an agreement.

Stock markets rose in December, supported by the Brexit deal, which particularly lifted medium and smaller companies that are more exposed to the domestic economy. The FTSE All-Share Index gave a total return of 3.9%. Sector performance was mixed, with the more cyclical and domestically exposed companies tending to outperform. The strongest performing sectors included electricity, fixed line telecommunications, mining and life insurance, whilst the weakest included pharmaceuticals, personal goods, beverages and banks. For the full calendar year, the UK stock market produced a negative total return of approximately 10%, although this marked a significant recovery from the low point in March.

The portfolio return was well ahead of the benchmark and drove a 7.5% return in the Trust’s NAV over the month, compared with the 3.9% from the index. Several companies’ shares produced double digit total returns, including Meggitt, Imperial Brands and Kin & Carta. The latter rose by over 30%, as it announced further corporate deals, building up its digital transformation business. But the biggest relative performance contributions came from not owning AstraZeneca and Unilever, which both gave small negative returns, holding back the index. The largest negative contributions came from BAE Systems, which fell back slightly, and from not owning Rio Tinto and Prudential, which both rose by over 10%.

We added one new company to the portfolio, Conduit Holdings. This is a new reinsurance company, established in Bermuda and listed in the UK. It has been set up to take advantage of a cyclical upturn in insurance pricing. This follows three years of large losses in the insurance industry, which has led to capacity constraints among insurers and sharply rising insurance rates. Conduit is led by an experienced team, that have managed several start up and more established insurance and reinsurance companies. We took part in the initial public offering of the company, investing at asset value.

We sold the remaining holding in National Express, after the recent rally in the share price, as explained last month. We also reduced the position in shopping centre owner Hammerson. This has been one of our worst investments in recent years, as the Covid-19 pandemic has exacerbated structural pressure that were already evident in the retail industry. Temporary centre closures have led to an acceleration in retail tenant failures and further rental declines. We supported the company’s rights issue in the summer, which we saw as a necessary step towards restoring financial security to allow the company time to reposition the business and realise its substantial asset value. The shares have subsequently rallied, and whilst there remains significant potential upside, there are also many risks and cash dividends are likely to be constrained for some time.

As we move into 2021, most of the uncertainty over Brexit and the UK’s future trading arrangements with the EU has finally been removed. This should make UK equities, which have been relatively cheap for some time, more attractive to global investors, even though many UK listed companies are multi-national businesses that are not that dependent upon the UK economy. The vaccine rollout at home and abroad should also lead to a greater investor focus on economic recovery from the pandemic, although the short-term outlook remains highly uncertain. Despite a recovery in “value” oriented shares in recent months, the stock market remains polarised and we still see many attractive investment opportunities. Merchants owns a portfolio of strong businesses trading on reasonable or low valuations, with supportive structural or cyclical thematic drivers. We believe this portfolio has the potential to deliver a level of income and total returns commensurate with Merchants’ objectives.