During December, the UK equity market produced a total return of 4.7%, as measured by the FTSE All Share Index. Large companies slightly outperformed, with the FTSE 100 Index returning 4.8% compared with 4.4% for the FTSE 250 Index of medium-sized companies¹. The key event during the month was the decision by the Bank of England to increase its Bank Rate from 0.1% to 0.25%. This move was in response to the increase in inflation, especially from rising energy prices, and with economic output having recovered almost all of the pandemic losses.

A notable outperformer during the month was British American Tobacco (BAT) where City of London has a large holding. BAT indicated, at its pre-close trading update, further progress in the growth of its less harmful products, continuing reduction in its debts and the possibility of a share buy-back going forward. On the other hand, Synthomer, the chemicals group, was a marked underperformer from City of London’s portfolio, on concerns about increasing supply in the nitrile it makes, which is used in products such as rubber gloves. An addition was made to City of London’s holding given the attractive share price valuation for a company with a technology leadership position in diverse, speciality chemistries. Some profits were taken in mining groups, Anglo American and BHP, after their strong performance in 2021 due to higher than expected commodity prices.

Looking forward, further interest rate increases can be expected, given the rise in inflation. However, the dividend yield of UK equities remains attractive relative to the main alternatives.

¹ Source: Bloomberg as at 31/12/2021

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