Finely crafted investments



Market Commentary - January 2018

Posted by David Stevenson on 20/Feb/2018

A few trading days into early February and the atmosphere in capital markets has changed dramatically. Everyone is an expert after the event, with commentators ranging in their views from the sell-off being a healthy correction that was bound to happen, to more dire warnings of an upcoming major turning point in late cycle momentum. Whatever ongoing effects the volatility might have, the cause is rooted in a change in investor expectations. Specifically, the surprise spike in US earnings inflation in January to a nine year high has prompted fears that the US central bank is behind the curve on interest rate policy. US market weakness sparked global contagion, amidst concerns that bond yields are now set on a rising path which will create sustained headwinds to the performance of equities. Amidst all this big picture noise, it should be recognised that market rates are going up for positive reasons – after a decade of stimulus, the global economy is at last growing strongly, and more importantly it is doing so in a synchronised way with most countries being upgraded. The UK is the exception, caused by local economic and political issues, but our domestic growth would be much worse without the global economy pulling us along in its slipstream. There are clearly major risks ahead – most notably the ability of central banks to withdraw the QE punch bowl without causing economic damage, and also the worrying combination of peak global debt to GDP figures (caused mainly by government borrowing) occurring at the same time as a normalisation of low interest rates looks set to begin. The recent jump in ten year US treasury yields to nearly 3% should be viewed in the context of an equivalent 4.5% or more at the start of 2007. Two contrarian comments are, however, worth making – firstly, the early February sell-off occurred after global markets had their best January since 1987, so a lot of gains were available to lock-in; and secondly, this is a reaction based on a single data point, although it probably crystallised the inflation fears investors have been nervous about for some time. The net effect of all of this is likely to be an end to the prolonged period of low market volatility we have been enjoying

TB Amati UK Smaller Companies Fund

The fund returned 0.3% in January versus a benchmark decline of 1.9%. The balanced gains and losses within the portfolio offered some resilience against a weak market backdrop. Strongest contributions came from larger holdings such as e-learning specialist Learning Technologies, which announced earnings significantly ahead of market expectations due to a combination of strong organic growth and the successful integration of a major acquisition; queuing software and on line ticketing provider Accesso, which similarly announced consensus beating earnings, once again due to organic and acquisitive growth; and gaming technology specialist Quixant, which produced another positive trading update, as did spirits mixer producer Fevertree, and online multi-asset trading platform IG. Major detractors from performance included utility metering services provider Smart Metering, which continues to achieve its growth targets but may have been hit bynegative sentiment towards geared balance sheets as yields rise; discount greetings card retailer Card Factory, which announced reasonable like for like revenue growth but continued margin pressure in a difficult trading environment; music equipment retailer Gear4music, which announced strong, but in-line, trading which may have contributed to a de-rating of its shares; and video gaming services provider Keywords, whose shares also weakened into a February update which prompted upgrades.

Amati VCT & VCT 2

Amati VCT returned 2.0% and Amati VCT 2 returned 2.2% in January versus a benchmark gain of 1.3%. The most significant contributor to performance was hospital software specialist Craneware, which announced strong underlying sales growth and a contract win with one of the largest healthcare providers in the US. Governance, regulatory and compliance software supplier Ideagen, also announced strong results built on organic sales growth of 13%; whilst e-learning specialist Learning Technologies, produced earnings significantly ahead of market expectations by combining organic growth with the successful integration of a major acquisition. Gaming technology specialist Quixant, produced another positive trading update, as did animal feed additive producer Anpario. Detractors from performance included automotive test equipment engineer AB Dynamics, human antibody clinical specialist Fusion, and video gaming services provider Keywords, each of which gave back recent gains despite no trading news. Aerospace precision component manufacturer Velocity Composites, also gave back recent momentum after its results showed strong revenue growth, but a lower gross margin than expected. Marine identification and tracking technology specialist SRT, was also weaker after recent small earnings downgrades.