August 2010
The FTSE All-Share Index rebounded strongly in July increasing by 6.9% on a total return
basis following weakness in May and June. Strong second quarter earnings coupled with the
soothing of European sovereign debt concerns led to the return of risk appetite. In addition,
the European banks’ stress tests did not reveal any untoward surprises although the market
questioned the severity of the assumptions. From a sector perspective, financials performed
strongly over the month as did oil and gas as BP’s share price recovered while the more
defensive areas of the market such as tobacco and pharmaceuticals underperformed.
The MPC decided to keep interest rates on hold for the seventeenth consecutive month at
0.5% as inflation reduced from 3.4% in May to 3.2% in June and the government’s fiscal
tightening initiatives moved closer. Second quarter GDP growth printed well above consensus
expectations at 1.1% helped by strong activity in the construction sector. However there are
still signs that the economy remains fragile with the housing market showing signs of slowing
down with the Nationwide reporting that house prices fell 0.6% in July while new mortgage
approvals fell in June. There was also weakness in the services PMI survey that fell to 53.1 in
July from 54.4 in June, the lowest level in over a year.
Over the month, we added to our holdings in ENI, Prudential, Sage and Pearson. All of these
companies offer generous yields, strong market positions and good growth prospects. In
addition, we marginally increased the weighting in Close Brothers following the assignment of
an option. Option assignments were responsible for all the sales during the month. These were
predominantly in companies that had performed very well, offered limited dividend yields and
were becoming more expensive such as GKN, BBA and Weir. We continued to write further
options as a means of gently increasing the income available to the Trust with calls in AMEC,
Weir and GKN and puts in Tesco, Roche and GlaxoSmithKline amongst others.
On a fundamental basis, we believe the path to sustainable economic growth remains
challenging and the outlook uncertain. Record budget deficits need to be repaired, savings
ratios enhanced to historic levels, inflation restrained, interest rates normalised, banking
re-regulated and quantitative easing unwound. None of these tasks are easy, and we remain
cognisant that the market may not necessarily be factoring in the full implications of the
tests ahead. We take increasing comfort that equity markets appear not to be expensive,
but volatility is likely to remain a significant characteristic of the market. However, where
opportunities present themselves we will continue to add to our holdings which we believe are,
in the longer term, attractively valued and maintain strong business models.
Source: Monthly Factsheet Aberdeen Asset Managers Limited