UK Equity Market update: Q3 2022

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

The third quarter was marked by further volatility and steep declines across almost all asset classes and geographies. Recessionary fears were stoked by persistent high inflation, interest rate increases and hawkish rhetoric from central banks; the peak in rates is now expected to be higher and later. Geopolitical tensions remained at the fore as disruptions to Europe’s energy supply increased with the suspension of the Nord Stream gas pipeline. The quarter ended with the UK Government’s fiscal announcements leading to market turmoil; the scale of the announced tax cuts and the lack of independent oversight from the Office of Budget Responsibility caused currency weakness and bond yields to rise sharply. Gilt markets fluctuated wildly due to short term collateral calls leading to intervention from the Bank of England. Political and fiscal uncertainty now stretches into the fourth quarter as markets await further announcements over October and November.

Large-cap companies continued to outperform the mid- and small-cap indices as the higher domestic exposure of the latter two acted as a drag. Although oil prices weakened significantly over the quarter due to concerns around slowing demand, the Oil & Gas sector continued to perform well; defensives sectors, particularly those with overseas earnings, such as Beverages, also outperformed. Domestically-exposed sectors, such as Housebuilders and Real Estate, were notably weak. Corporate activity continued apace with the weakness in sterling presenting attractive opportunities for overseas buyers.

Portfolios across the UK Equity team remained underweight the Oil & Gas sector which caused a drag on relative performance, although to a lesser degree than earlier in the year. Domestic earners were notable underperformers with weakness in Next, Rightmove and Moonpig. Positive contributions were seen from underperforming large stocks that are not held, including GlaxoSmithKline and Vodafone; Compass continued to exceed both revenue and margin expectations.

Risk: Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy and should not be construed as investment advice or investment recommendation of those companies.