During July, the UK equity market produced a negative return of 3.6%, as measured by the FTSE All Share Index. The more domestically focussed FTSE 250 Index of medium- sized companies outperformed with a negative return of 1.0% compared with a negative return of 4.2% for the FTSE 100 Index of the largest UK listed companies. One factor behind the underperformance of the FTSE 100 was the weakness of the US dollar, which fell by 5.6% over the month against sterling. In general, the FTSE 100 companies have greater exposure to the US dollar.
Both UK listed tobacco stocks, British American Tobacco and Imperial Brands, which are held in City of London’s portfolio, were notable underperformers in July. In our view, both companies offer attractive dividend yields covered by their cash flows. Specialist chemical company, Croda International, which announced good half year results was a notable outperformer among City of London’s holdings.
As widely expected, BP cut is dividend (by 50%) when it announced its half year results. Elsewhere, the news was more pleasing with dividends restored from several companies in City of London’s portfolio, including BAE Systems, IMI and Direct Line. As visibility in the stability of dividends improves, the dividend yield of UK equities, which is higher than the main alternatives, should in our view gain in attraction for investors.

Glossary
Dividend: A payment made by a company to its shareholders. The amount is variable, and is paid as a portion of the company’s profits.