December was another strong month for equity markets, particularly UK indices, which enjoyed a Santa rally in the run up to Christmas. After a series of upside surprises, key UK inflation measures all came in below expectations in November, including month-on-month core inflation turning negative for the first time since February 2021. The trend over the past few months suggests inflationary pressures are fading quickly, easing pressure on the BoE and allowing room for interest rate cuts in 2024. According to UK PMI data, which rose to a six-month high in December, the UK economy narrowly avoided entering recession in 2023, although manufacturing data continues to exhibit weakness. UK employment, whilst remaining robust in 2023, has begun to show signs of softening as higher rates take hold.

Our best contributors at the individual stock level were GlobalData, which reacted positively to news of a £434m investment in its healthcare business by Private Equity, and Bowling operator Ten Entertainment, which rose on the back of a recommended cash offer. Also strong in the period were several of the Fund’s more cyclical holdings, with Tremor, Stelrad and Somero rebounding from recent lows. Detractors this month included Diversified Energy, which received a request for information from Congress regarding well retirement and emissions. The company has already taken significant steps to address these issues in recent years by scaling up well monitoring and substantially reducing methane emissions. Also weak were two of the Fund’s media stocks, Future and LBG Media, as they reported soft consumer advertising outlooks.

The past couple of months have brought some welcome respite for UK equities after a difficult year. Despite the recent bounce, we feel the Fund continues to trade at a very attractive valuation range, especially in the context of cyclically low earnings. The resilience of the UK economy (particularly compared to many of our European peers), an improving cost of living outlook and the potential for rate cuts bode well for UK equities in 2024, but we remain mindful of both the uncertain employment and political outlook.