The fiscal stimulus plan and series of tax cuts and regulatory reforms announced in the mini budget sent financial markets into a tailspin with the pound reaching a record low and short-term interest rates and bond yields moving sharply higher upon the news that the IMF viewed the strategy as likely to increase inequality, and the rating agency, Moody, warning that unfunded tax cuts were credit negative.  The yields on five-year government bonds are now at levels similar to those of more heavily-indebted European economies such as Italy and Greece. Commensurate with this rise in short and medium-term interest rates, the quoted prices for income generating assets and REITs in particular, declined materially.

In response to what it referred to as recent “dysfunction”, the Bank of England (BoE) announced an emergency intervention in the government bond market to “restore orderly market conditions” but reiterated that it would not hesitate to change rates by as much as is needed to ensure inflation returns to the 2% target over the medium term.   As a result, yields on 10-year UK government bonds started to decline from recent highs and continued this trend when the PM and Chancellor reversed their decision to implement various tax cuts, especially that for high income earners.

For most businesses the damage has already been done with a substantial increase in US$ denominated input costs and a steep rise in borrowing costs.  However, as mentioned in last month’s note, in spite of the negative outlook at a macro level, recent results from companies in our portfolio and associated industries other than REITs (which are included for their yield) indicate that they have been able to partially withstand these inflationary pressures by implementing appropriate business strategies. During the past month our portfolio declined by 11.6% and, after providing for expenses and the interim dividend, the NAV was down by 12.46%, notwithstanding that the property related stocks comprising almost 30% of the portfolio were down on average by 18%.  This compares with the broad market index, the FTSE 250 index which declined by 11.92%.  The AIM All-Share Index fared slightly better, declining by 9.55%, while the FTSE100 declined by a lesser 5.53%.  The Small Cap Index and the Fledgling Index declined by 7.51% and 7.62% respectively.

Viewed against a global backdrop, the broad UK market was clearly the worst hit.  The MSCI Index declined by 9.46% during September, while in the US, the S&P 500 Index declined by a similar amount, down by 9.34%. The Dow Jones Industrial Average was down by 8.84% with the tech heavy Nasdaq Composite declining by 10.5%.

During the month we sold our holding in Jarvis after it announced a review of the systems and controls in its subsidiary, Jarvis Investment Management, pursuant to a s166 notice.  The proceeds from the sale were used to acquire additional shares in Impax Asset Management.  Cash comprised 12.3% of the portfolio at month end.