After a weak start to the month, the UK stock market rebounded strongly to post a solid gain during August as a whole, providing a total return of 2.2%*. From its low on 8 August, the FTSE All Share Index closed the month up 4.5%*, despite generally disappointing economic data which suggests that the global economy is losing momentum. Europe in particular, faces a troubling outlook with structural, cyclical and geopolitical issues combining to form a considerable impediment to growth. Deflation remains a key risk for the region and further policy support looks necessary. Whilst speculation that the ECB will initiate a programme of quantitative easing continues to grow, the political barriers to such a policy remain high, particularly from within Germany. Without further policy support, however, the outlook for the region remains very troubling.
The chart below illustrates that sovereign bond yields have been declining all year, signalling that the bond market is concerned that the fundamental economic environment is deteriorating. Thus far, despite the occasional wobble, equity market performance suggests continued complacency about the economic outlook. We are not complacent, however, and continue to advocate a cautious investment strategy with a focus on the long-term.
With the FTSE All Share Index trading slightly above its long-term average rating, it is difficult to argue that the market is attractively valued. Indeed, some parts of the market look over-valued in our view. Nevertheless, there are still pockets of extreme undervaluation and, by positioning the portfolio towards the more appealingly valued parts of the market, we remain confident of delivering attractive positive returns to our investors in the long run.
Source: Longview Economics
Many of these more attractively valued parts of the market performed well during August. Our core holdings in the pharmaceutical sector performed particularly well, led by AstraZeneca. Part of the 5.1% share price rise* delivered by AstraZeneca during the month must be attributed to speculation that Pfizer may still try to acquire the business. Having fended off a takeover approach earlier in the year, AstraZeneca was protected from a renewed bid for three months under UK takeover regulations. Those three months have now elapsed and negotiations could now resume under limited circumstances. Some market participants have become excited that a renewed bid may be just around the corner but we are not convinced. Such a move would seem to contradict the AstraZeneca management team’s public stance and we continue to believe long-term shareholder interests would be better served by the company remaining an independent entity. For this to be the case, AstraZeneca does need to deliver on the potential that exists in its pipeline of new drugs and, in this regard, newsflow is encouraging. For example, it’s MEDI-4736, a potential colorectal cancer therapy, moved into phase 2 trials during August and treatments for severe asthma and gout were also reported to be making good progress in phase 3 trials. This must also have contributed to AstraZeneca’s strong share price performance recently and reflects well on the considerable potential that we see in its pipeline of future drugs.
Elsewhere in the pharmaceuticals sector, GlaxoSmithKline performed well, bouncing off the lows experienced in July following its disappointing trading update. Prothena also performed well after releasing its second quarter results which showed encouraging pipeline progress.
Allied Minds, one of our intellectual property commercialising companies also performed well, its shares ending the month at 270p*, 42% higher than the 190p at which it listed on the London Stock Exchange in June. The shares benefited from some positive research coverage during the month and half year results also demonstrated that good progress was being made by the business and its portfolio of investments. We continue to see significant long-term potential and added to our holding towards the end of the month.
We also added to Drax in August, taking advantage of share price weakness following a court ruling that its second biomass unit conversion would not be eligible for an “Investment Contract” subsidy. This was a setback, as we believe a biomass conversion project of the scale that Drax is implementing should play a significant role in helping the UK to fulfil its carbon emission reduction obligations and therefore deserves consistent government support. At a time when the UK needs new electricity generation capacity to offset the retirement of old coal and nuclear which is coming off the grid, the lack of clarity and decisiveness around energy policy that this represents is very disappointing. Nevertheless, we continue to view Drax as an attractively valued asset with a very strong management team and a bright future.
In terms of other portfolio activity, we sold HSBC from the portfolio in August due to growing concerns about “fine inflation” in the banking industry. The proceeds were reinvested across a range of existing holdings, including AstraZeneca, BAE Systems and L&G.
We also added a few unquoted positions to the portfolio, an area of the market which we believe currently offers some extraordinarily attractive long-term investment opportunities. These included Purple Bricks, an innovative new estate agent with a highly disruptive business model. With its vision, technology and experienced management team, we believe Purple Bricks has a compelling opportunity to lead the market in changing the way we buy and sell houses in the UK. We also took part in the latest funding round for Oxford Nanopore, a very exciting early-stage business which is developing the next generation of gene sequencing technology.
In general, portfolio activity continues to run at higher levels than would normally be the case, as the strategy continues to take shape. Our investment approach remains anchored on long-term decisions, however, with a consistent and disciplined focus on valuation and fundamentals. This is the same investment approach that has served our investors successfully for the long-term in the past and we are very confident that it will continue to do so in the future.
* Source: Bloomberg
The views expressed in this article are those of the author at the date of publication and not necessarily those of Woodford Investment Management LLP. The contents of this article are not intended as investment advice and will not be updated after publication.
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