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InterestingLeigh: The boy who cried wolf

Leigh Himsworth, head of UK equities at City Financial and manager of the CF Eden UK Select Opportunities Fund, provides commentary for May

The UK equity market continues its relentless rise, up another 0.63% in April giving a total return from June 2012 to the end of April this year of 28.5%! I recently re-read my fund commentary from six months ago where I expressed a degree of caution with the market having risen so strongly especially post Mario Draghi’s comments in June of last year. Well, six months further on, in expressing a cautious note, I find myself crying wolf again! Though I think now that I am beginning to slowly understand what has happened and how to play this.

One issue has been that into such a strong rebound in markets it has been a surprise to see some of the more defensive large cap stocks leading, though in the case of Pharmaceuticals this may be partly a function of having been left behind for so long. It remains the case that more commodity related areas including Gold and Oil have struggled; the Oil sector as a consequence has been the most disappointing area of the Fund in the past six months.

Markets appear to be strengthening due to a growing view that the consumers are finding their feet once more in the US and to some extent the UK. As the lack of demand has been a crucial factor in the past five years, this is a key point. I regularly log on to Fox News which I regard as a great way of catching up on US ‘tittle-tattle’ and the general feel of the average person the other side of the ‘pond.’ It has been noticeable that recently they have had some generally positive headlines re the consumer, including ‘US consumer confidence up on better hiring outlook,’ ‘US consumers boost spending 0.2% last month,’ ‘Cancun hotel data suggest tourism improving,’ and ‘Survey: Americans felt more secure in jobs in 2012.’ Maybe the worst is now genuinely behind us.

Given that we have also seen the price of oil fall markedly since highs of $118.9 per barrel in February to the current $100(1) we may see a continuation of this consumer confidence as this feeds through to falling prices at the pumps. Please note, Harrogate Sainsbury have diesel at 136.9p per litre, it is €1.369 at Intermarché in Rambouillet, France.

Another niggle is the fact that news flow from more industrially focused areas remains cautious at best and more recently earnings announcements have begun to show some signs of weakness with the ratio of companies beating forecasts dropping markedly.(2) Many companies are suggesting a need for a strong second half to meet expectations. Indeed, a number of management teams have expressed caution over their market outlook having seen substantial weakness in end markets in a range of geographic areas.

Looking forward, I suppose given the relative performance of sectors over the past six months or so one would expect some mean reversion to play out, some rebound in Mining, Oils and Industrials versus weakness in more consumer facing areas. My problem is that a catalyst of some sort is needed for this to take place and if anything the news flow appears to support a continuation of what we have seen.

As valuation is one of my key drivers, I thus find it difficult to totally abandon some of these unloved sectors as they do seem to offer great value. My other fear is that the massive monetary stimulus is the key factor in all of this, as indeed it should be, but I do constantly worry about what happens on cessation, though this is unlikely any time soon.

Even with my worries I am happy that I continue to find compelling ideas. New additions to the portfolio this month have included Legal & General, bought following the strong results from Standard Life and Optimal Payments that is a play on the growth in online money transfer services and risk & fraud management services. Out this month has been London Mining, on a desire to reduce exposure to smaller miners in the portfolio and also AMEC that may well have seen their peak margins already achieved. I prefer to focus on the holding in Kentz in the Oil Services sector, a far more appealing prospect in underlying business and valuation.

I end the month with 58 stocks, with 21.2% in FTSE 100, 49.1% in Mid 250, 28.0% in Small Cap & AIM and 1.7% in cash.

Given the antics of Mr Luis Suarez, Liverpool are going to start next year with a Four – Four – Chew formation. Yes I know, Leeds would be happy with any formation!

1) Bloomberg
2) Peel Hunt UK Earnings Revisions April 2013