In our January blog we introduced our 16 “Best Ideas” for 2018 and alluded (perhaps tempting fate) to our strong track record for this portfolio over many years. It is with pride and relief then that I can confirm at the start of July that in the first half our picks were up 10% in aggregate and outperformed the FTSE All-share by 9%. Perhaps as important, the majority of our stock picks beat the market in H1 and most of our top down themes appear to be working. So for example we said that Media stocks should do better in 2018 than 2017 thanks to it being a “mini quadrennial year” and this sector is now at multi-year highs. Our star performing pick, though, was Fenner which was up over 50% in H1 thanks to the bid from Michelin and we are very glad to have returned this stock to the Buy list back in January 2017 at what looks now like a bargain basement price of 256p.  Four other picks provided strong double digit outperformance as well.

With Fenner now de-listed we remove it from the portfolio and replace it with two other Industrial related stocks for the second half. Active users of this site may recall that in our March blog we talked about the prospects for Industrials having started the year with an Overweight position. We were mindful that at some stage the PMIs would likely roll over and in due course the growth in Industrial Production would start to tail off – this potentially leading to a de-rating in the Industrial stocks as we have seen in the past. The rolling 12 month P/E since January is almost unchanged for Engineers at the end of June at c.17.6x and down slightly for Electricals to c.20.9x. However the relative valuation has become even more expensive. This fascinating debate will continue in H2 – for now we note that the PMI in the USA is the highest of the major regions (albeit past the Feb peak of 60.8) and Industrial Production has strengthened during 2018. This counterbalances slowing Industrial Production during 2018 in Japan and Europe. Meanwhile Chinese Industrial Production growth has been steady at 6.6%, pretty much for 12 months. This all adds up to good solid growth for companies in 2018 (as we said in January), but less good growth by the end of the year. 2019 will see slower growth than 2018, but still growth.

We also started the year maintaining our cautious view on the Consumer and Retail sectors with an initial focus on resilience, self-help and low ticket. These sectors had a very tough Q1 and on 27th March we then revisited the potential for a better H2 in our Trend spotting piece “Consumer traffic lights”, a note that proved very timely. After bouncing at that stage helped by a more favourable view on wages and inflation (and we note the fifth consecutive increase in the Asda Monthly Income Tracker in the last week of June), some of the “green” lights started to change back to “amber” during Q2 – namely cable and the oil/petrol price.  With continued Brexit and other uncertainties from weather to geopolitics, it could remain tougher for longer and this will remain a fascinating stock market debate for H2.

Elsewhere given the uncertainties, we continue to lean heavily on our various secular growth picks in Life Sciences, Healthcare, Technology and Financials which generally yielded solid performances in H1 – also domestic areas of cyclical strength such as regional construction and house building, plus self help initiatives and potential market share gains.  From a Quant perspective (see last month’s blog), we suggested that our Growth and Quality styles would continue to generate good returns in 2018 and these styles have indeed continued to perform well (after a hiccough at the end of January). Intriguingly Value as a style also has shown relatively resilient performance amid the less certain background. It could be that we are finally seeing value acting as a defensive counter to volatility, which often arises in large-cap stocks, but which we have rarely seen with our work focussed on smaller companies. Watch this space!

Best of Luck with your stock picking in H2.