In October, the Chancellor of the Exchequer, Rishi Sunak, delivered a high spending budget, with few signs of a return to austerity. Speculation also grew that the Bank of England could enact its first interest rate increase since the pandemic as early as November. This speculation was driven by rising consumer prices inflation on the back of surging UK gas prices, labour shortages and higher global commodity prices. Inflation was running at over 3%, close to its highest level since 2012. This created volatility in the UK government bond market, with 10-year gilt (UK government issued bonds) prices falling sharply, before recovering most of their losses towards the end of the month. In contrast, the equity market level was relatively flat, though several businesses warned about supply chain disruption and rising cost pressures.

The FTSE All-Share index gave a total return of just under 2%, led by the large banks, which benefit from rising interest rates. Other strong performers included many cyclical industrial sectors and utilities. In contrast the more defensive telecommunications and food producer sectors were weak, along with the travel & leisure sector, on fears over further lockdown restrictions being introduced.

The Trust’s NAV total return for the month was 2.6%, ahead of the 1.8% return from the Benchmark. The biggest positive stock contributors to relative performance were Man Group, which reported strong third quarter flows, Drax and Rio Tinto (not owned). The main performance detractors were HSBC (not owned), Tyman and Tate & Lyle.

We made a new investment in emerging markets fund manager Ashmore. The share price had fallen back significantly, since we sold out of the company in 2019, on the back of more challenging performance in their funds and weaker investment flows. However, through that period, we had continued to view this as a strong company, with a solid balance sheet and with exposure to an attractive asset class and at purchase, the valuation was back to a more attractive level, with a 5% dividend yield.

We also added to the holding in retailer Next, where our level of conviction had increased, after interim results confirmed continued strong trading in its online business, even after the shops reopened. These investments were financed by some profit taking in Man Group, Stock Spirits and St James’s Place, as well as a reduction in the energy exposure after recent strong performance.

The FTSE All-Share Index closed October close to its high point for the year, and roughly at the same level where it traded before the pandemic. That may indicate that the best investment bargains during the pandemic are no longer available, although by their nature, the best bargains are usually only around at times of greatest uncertainty. However, the UK stock market remains one of the cheaper markets globally, and valuations in aggregate are not excessive. Furthermore, there remains a high degree of polarisation, providing opportunities for active stock pickers, to identify strong businesses trading at attractive valuations. There are a number of risks emerging, such as supply chain disruption and rising commodity costs. These may put pressure on certain industries and businesses. We aim to mitigate these risks by investing in a diversified portfolio, across defensive and more cyclical industries, and aiming to identify reasonably priced but fundamentally strong businesses, that offer long term value. By doing this, we aim to deliver a combination of income and capital growth in line with Merchants’ objectives.