In October, the UK equity market produced a negative total return of 1.4%. After the UK government reached a revised Withdrawal Agreement with the EU, optimism about an orderly Brexit led to sterling rising over the month by 5.3% against the US dollar and 2.9% against the euro. This is a headwind for UK companies with large overseas profits, which are adversely affected when translated back into British pounds. The FTSE 100 Index of the largest UK companies, which is biased towards overseas earners, underperformed with a negative return of 1.9%. In contrast, the more domestically focussed FTSE 250 Index of medium-sized companies outperformed with a positive total return of 0.6%.

Telecommunications group, BT, which is held in City of London’s portfolio, was the best performer in October in the FTSE 100 Index. On the other hand, healthcare group, Smith & Nephew, which is also held in the fund, was a notable underperformer after it announced the departure of its chief executive. During the month, City of London’s stake in pub group, Greene King, was sold ahead of its takeover by CK Asset of Hong Kong. A new holding was bought in Wm Morrison Supermarkets which has a strong record of free cash flow generation.

The UK political outlook remains uncertain with the general election campaign underway. The UK stock market has exposure through the companies which are listed on it to a mixture of the domestic as well as the global economy. UK equities continue to offer an attractive yield compared with the main alternatives.

Glossary

Yield: The level of income on a security, typically expressed as a percentage rate. For equities, a common measure is the dividend yield, which divides recent dividend payments for each share by the share price. For a bond, this is calculated as the coupon payment divided by the current bond price.