April was a positive month for UK markets, with relatively low volatility in share prices and a generally more optimistic tone.
Worries about higher inflation and rates in early May have since put a dent in sentiment, but more on that next month.
Turnover was low during April. During the upbeat market conditions enjoyed in April, we were largely happy to sit on our hands and let our investments do the work. Our main portfolio activity was initiating a new investment in London Stock Exchange Group (LSEG). LSEG is a business that we have followed for many years and have long admired due to its high quality data (FTSE Russell), clearing (London Clearing House, LCH) and capital market assets.
In fact, we know LSEG to the extent that one member of our investment team (who shall remain nameless) was one of the last members of the London Stock Exchange back when deals were placed on the trading floor in person (much more fun!). LSEG shares have fallen by a third since February on worries that their Refinitiv acquisition might prove a step too far for them and that clearing volumes will leave London post-Brexit. We acknowledge that both of these factors are a risk, but we feel that the market is now pricing-in a worst case scenario for each of these and that there is ample margin of safety with their shares now below £70. Specifically relating to clearing volumes moving to Europe, we feel that the media has overplayed this risk and that it would be a huge and risky upheaval to move the clearing of derivatives and FX away from London.
It is the large US banks that do the majority of the volumes through LCH and they are not motivated to change a clearing system that has functioned well for decades. Dealing in shares and swaps did move from London to Europe on the 31st December 2020, but this is not the heart of LSEG’s clearing business and we believe that the market and media has jumped to incorrect conclusions. LCH remains the central counterparty in the great majority of this derivatives/FX business and would be arduous (and very expensive) to replace. We have been steadily adding to LSEG over recent weeks and believe that the business will surprise the naysayers.
Elsewhere, we took the opportunity of some weakness in the Healthcare sector to add to our positions in Smith & Nephew and Bioventix. We were particularly interested to read Smith & Nephew’s recent trading update, where management noted a return to growth in all of S&N’s major franchises, driven by US hospitals returning to elective surgery. We expect that there is plenty of pent-up demand for new knees and hips after the majority of these operations were paused in 2020 and expect more good news out of S&N as 2021 continues.