November finally saw UK Prime Minister Theresa May unveil the UK’s Brexit withdrawal agreement, which was subsequently agreed by the EU, although there remained considerable uncertainty over whether it could be passed in the UK parliament. Elsewhere, US-China trade tensions continued to concern global investors. The risk of tariffs impacting the US economy was partly to blame for US government bond yields declining over the month (and bond prices rising). The theme of weakening economic growth expectations was further supported by the Chairman of the US Federal Reserve, who hinted that interest rates may not need to rise that much further.

Concern about slowing growth, and uncertainty over Brexit, weighed on the UK stock market, which recorded a modest decline in November, but with considerable volatility at the individual stock level. The worst performing sector was tobacco, on concerns about tighter regulation in the US tobacco market and a possible ban on menthol cigarettes. Otherwise, the weakest sectors were typically industrial and commodity sectors, which are sensitive to global growth expectations. The best performing sectors were generally defensive sectors, such as telecommunications, beverages and pharmaceuticals, with mobile telecommunications leading the pack, as Vodafone’s interim results and a maintained dividend reassured investors.

The Trust’s NAV fell by -3.7% over the month, lagging the benchmark return of -1.64%. Stocks that were not in the portfolio had a big impact on relative performance, both on the positive and negative side. On the negative side, not owning Vodafone and Diageo held back performance, as both of these performed well and helped the overall index return. Also, the gaming stock GVC Holdings was weak, as the government brought forward curbs on betting machines. On the positive side, not owning British American Tobacco helped the relative return, as the shares fell by almost 20% over the month. Elsewhere, Greene King rallied on reassuring results and GlaxoSmithKline outperformed due to its defensive qualities.

There were no major changes to the portfolio structure in the last month, but we took advantage of considerable stock volatility to make changes to a number of positions. We reduced holdings in companies that had significantly outperformed the market, where the upside potential had declined, to fund further investments in shares that had underperformed, and offered excellent value. In particular we reduced GlaxoSmithKline, Tate & Lyle and Marks & Spencer, to fund investments into BAE Systems, Imperial Brands, GVC and BP amongst others. Elsewhere, we also reduced exposure to FirstGroup, where the anticipated recovery in the business is taking longer than we had expected.

As we write this report, stock markets are going through a period of volatility, prompted by uncertainty over the outlook for global economic growth, US-China trade tensions and Brexit. However, recent declines in share prices mean that there is excellent long term value now available in many UK listed companies, particularly as the bulk of sales and profits of quoted stocks comes from outside the UK. One interesting statistic, according to Morgan Stanley, is that around a third of UK medium and large companies now have a dividend yield of 5% or above, which we have not seen since the financial crisis. We remain focused on identifying strong businesses with sound prospects, that we can buy on attractive valuations, in order to deliver Merchants’ objectives of an above-average dividend yield and long term capital growth. Today’s uncertainty is providing many such opportunities, and we are excited about the potential future returns of the portfolio holdings.