I recently became a father.
A month on and I’ve changed more nappies than I’ve eaten hot dinners, had little sleep and spent countless hours looking at our baby expressing glee at every noise (mostly wind based) and expression he makes.
On reflection I’ve had countless sleepless nights, devoted a huge amount of attention for only fleeting moments of reciprocation and occasional pangs of panic that take significant effort to subdue. But enough about investing, becoming a parent has been a real joy and hugely rewarding.
Meanwhile it looks like the woes of Q4 have been forgotten as equity markets have continued to rally with some testing new highs. The bounce back has supported by the Fed’s change in tune on rates and, importantly, quantitative tightening. Other factors, such as diminished threat of trade wars and Chinese stimulus have helped create a benign environment for risk assets – oh and the Brexit can kicked firmly down the road.
It certainly feels a more relaxed market than in Q4 (when it was the market that was causing me sleepless nights). The re-rating of the market from a forward dividend yield of nearly 5% back to around 4.5% feels justified rather than toppy. However, the spread of UK equities vs gilts remains as wide as it has been since the World Wars (please see February’s blog for the chart) suggesting there is relative value in the UK equity market. Further, earnings season has been generally positive for companies and this has helped reassure investors that expectations that were reset in Q4 are achievable and possibly beatable. What is notable is that it has been a largely cyclical rally with some of the most defensive sectors lagging.
In the UK we do not see valuations as wildly elevated although accept that if you want to buy quality growth you will likely have to pay up. This perhaps reflects a market where investors are aware of the age of the cycle and so are willing to pay top dollar (pound) for those stocks that have shown they can grow in adverse markets.
In April JD Sports delivered a cracking set of results extending the rally which began at the start of the year when they reported an 11 month trading update showing strong UK trading. The stock had a topsy turvy 2018 – despite solid results the market de-rated the shares due to concerns the big brands going direct to consumer and as part of the general market selloff in Q4, which impacted growth and “UK” stocks particularly harshly. We’d argue the stock is very much international and actually the brands want a strong 3rd party retailer to showcase their product. In fact it is the strength of JD’s relationships with its key brands which has facilitated expansion into Europe and more recently into the US. The strong trading and the opportunity in the US have led the shares up 79% YTD, in fact since the turn of the century the stock is up a remarkable 8434% (equivalent to 25% pa) making it one of the best performers in the UK equity market.
JD Sports has been a key holding in a number of our UK funds and we are the biggest institutional holder of the stock.
Diamond miner Petra Diamond has struggled YTD as a combination of operational issues and significant debt have caused investors to sell the stock driving the share price down 41% to 1 May 2019.
JPM UK Equity Plus closed a short position in this stock earlier this year having been short since May 2016.
All data is sourced from Bloomberg and dated 1 May 2019
Callum Abbot is a portfolio manager for the JPM UK Equity Plus Fund and the JPM UK Equity Core Fund.
JPM UK Equity Plus Fund
To provide long-term capital growth through exposure to UK companies by direct investments in securities of such companies and through the use of Financial Derivative Instruments (derivatives).
The value of Equity and Equity-Linked Securities may fluctuate in response to the performance of individual companies and general market conditions. The Fund invests in securities of smaller companies which may be more difficult to sell, more volatile and tend to carry greater financial risk than securities of larger companies.
The Fund can use sophisticated investment techniques that differ from those used in traditional Equity funds.
There is no guarantee that the use of long and short positions will succeed in enhancing investment returns.
The Fund may use Financial Derivative Instruments (derivatives) and/or forward transactions for investment purposes. The value of derivatives can be volatile. This is because a small movement in the value of the underlying asset can cause a large movement in the value of the derivative and therefore, investment in derivatives may result in losses in excess of the amount invested by the Fund. The possible loss from taking a Short Position on a security (using Financial Derivative Instruments) may be unlimited as there is no restriction on the price to which a security may rise. The Short Selling of investments may be subject to changes in regulations, which could adversely impact returns to investors. The single market in which the Fund primarily invests, in this case the UK, may be subject to particular political and economic risks and, as a result, the Fund may be more volatile than more broadly diversified funds.
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