Just another extraordinary quarter of lockdowns, vaccines, Matt Hancock and the confusingly named Euro 2020s.

UK markets have been remarkably placid through all of this, moving gently higher over the quarter. On 30 June, the FTSE 100 was +8.9% year to date, FTSE 250 +9.2% and the FTSE Small Index a stonking +18.1%. Before setting off the whole box of fireworks, we begrudgingly have to acknowledge that (small caps aside) UK equities continue to lag global peers, with the S&P 500 +14.4% YTD, Dax +13.2% and CAC 40 +16.5%. The FTSE 100 remains stilted by heavy weightings in Banks, Oil & Gas and Mining and, at the index level, lacks big weights to exciting growth sectors such as US tech, German industrials or French luxury goods and cosmetics.

While we agree that the FTSE 100 as a whole contains its fair share of mediocre businesses, there are also some genuinely unique businesses listed in London. As stock pickers, we are lucky enough that we only need to focus on the exceptional businesses and leave the price takers and commoditised sectors to others. It is interesting to note still more overseas buyers sniffing around the UK for acquisition opportunities, looking to pick up discounted assets and take advantage of ongoing low interest rates. Wm Morrison Supermarkets is the latest and most prominent in a growing list of UK companies that have been subject to takeover bids, this time from multiple and competing private equity businesses. Do not forget that the Issa brothers completed on their £6.8 billion acquisition of Asda from Walmart only a few months ago. Looking at other names to have been acquired recently, such as Marstons (pubs), St Modwen (property developers) and John Laing (infrastructure investors), it is worth noting that these are businesses with substantial ‘real’ asset backing (i.e. property). Time will tell what these buyers intend to do with these large property estates, but my point is that there is encouraging demand for UK assets and that we expect this to continue.

At the sector level, it was Healthcare that led the market in the second quarter, with index heavyweights AstraZeneca and GlaxoSmithKline coming back into favour with the ‘reflation trade’ unwinding somewhat. On the other side of this rotation, it was Consumer Discretionary names that lagged as investors realised that it was not going to be a straight line recovery from COVID-19 as vaccines are rolled-out. Within our portfolios it is notable that while some names, such as Diageo, Greggs or Auto Trader, have bounced back strongly from 2020 on the anticipation of recovery, the likes of Unilever, Smith & Nephew and Berkeley Group have been decidedly pedestrian. Just taking these three businesses as an example, we are very confident in the long-term outlook, but the market is still not giving them benefit of the doubt. Patience will reward these names in time.

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