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InterestingLeigh, August 2013

Leigh Himsworth, head of UK equities & manager of the City Financial UK Select Opportunities Fund

The market rebound in July has been of such a scale that it has produced one of the largest monthly gains in recent years! Whilst I am more than happy with such a gain, I must have missed something as I saw no great news announcement or takeover to speak of? My guess is that we have been driven in large part by the fact that US economic activity, whilst positive, has not been strong enough to induce the Fed to taper its asset purchase programme. The fact that leadership has continued in the sectors that have so far been strong this year would vindicate this stance.

On the face of it, earnings revisions in the UK have been poor and throw doubt on the equity market exuberance, but this has been distorted by some significant downgrades across the mining sector which still represents over 8% of the benchmark. Once mining is removed, UK numbers have been good in addition to economic news flow which continues to improve modestly. The on-going weakness in Sterling should provide further impetus for exporters though a threat in this regard is always input costs, notably oil which has remained stubbornly high, given the instability in Egypt. According to the US Energy Information Administration, 2.24m barrels of oil move through the Suez Canal or the Suez pipeline per day.

Further to the more positive signs from the US and UK, it would also seem that there are growing indications that the periphery of Europe may have seen the worst, with economic sentiment indicators improving. Whilst there has been some softening of German numbers, this could simply be due to some nervousness ahead of the elections in late autumn.

All told, it continues to be a case of seeming riskier to be out of markets and missing out on gains than of being in and suffering any setback. Yes, I hear the doomsters with their predictions of calamity and I too fear the mechanism for ‘normalising’ bond yields, but the fact remains there will be no change in monetary policy at any time soon, and the message from the Americans is that monetary and fiscal stimulus will only be turned off when growth is definitely re-established.

Consequently, I remain fairly fully invested, with less than 2% cash, and since the fund lost some ground in the ebullient markets of late April I have been keen to insulate the portfolio against such relative losses should we see further equity market strength – this explains, in part, my decision to introduce Lloyds Bank and Legal & General into the portfolio in late April and May. In the very near term there is some evidence that the markets, particularly at the smaller end, look to be overbought, but it does not take a genius to appreciate that, following a monthly rise of nearly 7%. Due to the above comments, I am reluctant to raise cash levels, though I do remain cautious with our investment style, as always.

More topically – much of Northern Europe appears to define a heat wave as a period where the maximum daily temperature is above 25°c for more than five days; in the UK, it is anything that makes you uncomfortably warm at your desk! If you are reading this in Scotland and wondering what 25°C is, then just move a little closer to the fire.