Market Review
Markets enjoyed a recovery during the quarter as it became clear that the US/Israeli conflict with Iran would not escalate into a wider regional war. The focus of investors returned to second-guessing the impact of AI adoption, with market leadership increasingly dominated by the semiconductor industry.
The MSCI World index, with its greater exposure to technology companies, generated a return of 13.0% over the quarter. The influence of AI upon investment returns is stark. Software companies have reversed all of their relative gains of recent years in recent quarters as investors bet that AI will erode the value of traditional software businesses. Even so, Technology was the strongest sector globally in Q2, but this was very reliant upon Semiconductor names. The Philadelphia Semiconductor Index rose by almost 90% during the quarter, far outpacing the 33.5% gain recorded by the wider Technology sector.
In the UK, where technology stocks are only a minor component of the broader market, the All Share Index still managed to generate a return of 4.7% over the quarter, quite a number behind other major markets. Banking names were prominent amongst the winners over the quarter, whilst the biggest drag on the index came from the Energy sector, which surrendered most of the gains that had been made upon the outbreak of the conflict in the Middle East.
The US posted returns of over 14%. Surprisingly unfazed by the ongoing conflict with Iran, the world’s largest economy continued to show resilience with unstoppable capital expenditures directed towards data infrastructure supporting the AI boom.
On the continent, Europe delivered 12.3% for the period. With tensions easing somewhat in the middle-east, the de-escalation allowed for the region to breathe a sigh of relief.
Emerging markets also had a strong run for the period with a remarkable gain of 23.3% in GBP terms. The index has significant exposure to tech hardware and benefited greatly from the quarters trend.
Commodities on the other hand was out of favour. The weakness of oil prices as the Middle Eastern conflict cooled meant that Energy sector weakness was a global phenomena in Q2, with the sector acting as the biggest drag on the global index too. Precious metals such as gold also underperformed, falling by 13.4% as investors continued to lean towards growth stocks with a risk-positive attitude.
Fund Performance
30/06/2021 To 30/06/2022 | 30/06/2022 To 30/06/2023 | 30/06/2023 To 30/06/2024 | 30/06/2024 To 30/06/2025 | 30/06/2025 To 30/06/2026 | |
|---|---|---|---|---|---|
HL Select UK Income Shares A Acc | 1.3% | -2.2% | 12.1% | 7.5% | 11.1% |
FTSE All-Share TR | 1.6% | 7.9% | 13.0% | 11.2% | 21.9% |
A UK Equity Income NR | -0.3% | 4.0% | 14.5% | 10.5% | 15.3% |
Winners and Losers
Description | Portfolio Weight % | Total Effect |
|---|---|---|
STANDARD CHARTERED PLC | 5.02% | 0.50% |
HISCOX LTD | 2.60% | 0.39% |
BAE SYSTEMS PLC | 0.00% | 0.38% |
STANDARD LIFE PLC | 3.20% | 0.34% |
LLOYDS BANKING GROUP PLC | 5.01% | 0.25% |
BABCOCK INTERNATIONAL GROUP PLC | 1.44% | -0.32% |
RENTOKIL INITIAL PLC | 2.66% | -0.33% |
BARCLAYS PLC | 0.27% | -0.38% |
WEIR GROUP PLC | 2.07% | -0.46% |
3I GROUP PLC | 1.16% | -0.78% |
Stock comments
Within Financials, Standard Chartered and Lloyds both contributed strongly to relative performance as both rebounded following weaker starts to the year. In our view, the easing of tensions in the middle east refocused investors on the banking sector’s improving operational momentum supported by higher interest rates, disciplined capital allocation and attractive shareholder returns. Standard Chartered was buoyed by an investor day held in Hong Kong detailing its aspirations to accelerate growth in the medium term, notably from its corporate and wealth divisions. Whilst the banking sector exposure benefitted the portfolio overall, underweight positions in HSBC and Barclays detracted from performance.
Elsewhere in Financials, Standard Life and Hiscox both contributed to relative returns. Both shares have performed well over the past 12 months. For Standard Life, the recent price strength is a result of their acquisition of Aegon UK which accelerates their growth ambitions and increases their exposure to higher-quality, fee-based earnings. Hiscox shares performed strongly during the quarter, with takeover speculation providing a significant boost to the share price..
3i Group detracted from relative returns. Investor sentiment weakened over the quarter as concerns persisted around Action, its largest portfolio holding. Like-for-like sales growth slowed, reflecting softer consumer demand, particularly in France, while investors also remained cautious on the pace of the company's US expansion. Although management highlighted resilient trading across other markets and announced a £750 million share buyback. In our opinion, these positives were outweighed by concerns over slowing growth. We exited the position during the quarter.
Changes
We initiated a new position in United Utilities, the regulated water and wastewater provider serving North West England, participating in the company's share placing. We believe the business offers the potential for an attractive combination of defensive earnings and a supportive regulatory backdrop at an appealing valuation, providing the capability for resilient long-term growth. Against this, we have significantly moderated our position in SSE following very strong share price performance.
We also established a new holding in Convatec, a global medical products and technologies company focused on chronic care, following further research highlighting the company's attractive growth prospects and undemanding valuation. The shares have performed poorly recently, and now with a more defendable valuation and reset expectations, we believe there is an opportunity to gain access to a company which has the potential to deliver sustained earnings growth, supported by a strong portfolio and favourable structural demand across its end markets.
As stated above, we sold our position in 3i Group during the period. Following recent developments at Action, its largest portfolio holding, we reassessed the investment case and concluded that the balance of risks and potential returns had become less favorable.
We sold our holding in Barclays, funding an increase in our holding in HSBC to reflect our positive view on the Asian banks following our visit to Hong Kong in April. We came away incrementally more excited about the growth opportunities available over the medium-term.We also exited our position in Segro, reallocating capital to higher-conviction opportunities, including United Utilities. While we continue to see merit in the long-term investment case, we believe the shares remain constrained by the interest rate environment and broader UK political uncertainty.
Outlook
The geopolitical backdrop remains fluid and we believe that markets are likely to remain sensitive to developments in the Middle East, trade policy and fiscal decisions across major economies. Whilst easing energy prices have reduced some of the immediate inflationary pressures seen earlier in the year, the outlook for interest rates remains finely balanced. Central banks continue to navigate the challenge of returning inflation sustainably to target without unnecessarily slowing growth, suggesting that expectations for policy easing are likely to remain volatile.
Alongside these macroeconomic considerations, the rapid evolution of AI continues to reshape investor sentiment across a broad range of sectors. Whilst markets will continue to debate the ultimate beneficiaries, we believe the greatest long-term opportunities will accrue to businesses with proprietary data, durable competitive advantages and the financial resources to invest through the cycle. Our focus remains on identifying those companies rather than attempting to predict short-term market rotations.
We believe that with the immediate spectre of an energy crisis diminishing, the UK fiscal backdrop has stabilised. As one of the more sensitive economies to an oil shock, the falling energy market has brought temporary calm to inflation expectations and, as a result, to UK gilts. Having at one stage priced in as much as four rate hikes during the quarter, our opinion is that these rate expectations have now moderated considerably. The next challenge in our view, particularly for gilts, will be overcoming the political uncertainty following Sir Keir Starmer's resignation and the expected appointment of Andy Burnham as Prime Minister. However, fiscal discipline is likely to remain an important constraint regardless of the change in leadership. More importantly for the equity market, the majority of earnings generated by UK-listed companies originate overseas, leaving corporate performance more closely linked to global economic conditions than domestic GDP. We believe the UK's persistent valuation discount continues to attract strategic and financial buyers, reinforcing our constructive long-term view.
Against this backdrop, we remain focused on businesses capable of compounding earnings across a wide range of economic environments. We continue to favour companies with durable competitive advantages, strong balance sheets, high returns on capital and disciplined capital allocation. Whilst market volatility is likely to persist, it also provides opportunities to increase exposure where valuations become disconnected from long-term fundamentals.