In May, the UK equity market produced a total return of 1.1%, as measured by the FTSE All Share Index. The FTSE 100 Index of the largest companies also returned 1.1% while the FTSE 250 Index of medium-sized companies returned 1.0%. Economic growth picked up, helped by the reopening of many sectors of the economy and by the accommodative monetary and fiscal policy in place. On the other hand, inflation rose partly due to the higher oil price.

Among sectors, travel & leisure was a notable underperformer with visits to many countries restricted for UK citizens. City of London has significantly less exposure than the market average to this sector which may take longer to recover than expected and offers little in dividend payments. The cruise line industry has been particularly badly affected by the pandemic and City of London’s holding in Carnival has suffered. However, Carnival’s valuation has recovered from the lows, especially if its additional debt is taken into consideration and it was decided to sell City of London’s holding.

The utilities sector had a satisfactory reporting season for 12-month results. Additions were made to City of London’s holdings in National Grid, Severn Trent, SSE and United Utilities. All these companies increased their dividends. It was also pleasing to see the strong share price performance from M&G, the fund manager and life assurer, which is one of City of London’s ten largest holdings. It was revealed that Schroders, the fund manager, had considered acquiring M&G.

Economic growth is expected to remain strong with pent-up consumer demand for goods and services and the high level of the savings ratio. It is questionable how long quantitative easing and ultra-low interest rates can remain in place given rising inflationary pressures. The dividend yield of UK equities remains attractive relative to the main alternatives and the outlook for dividend payments is much improved given economic growth in the UK and overseas.

Janus Henderson Commentary