Valuations, however, are very beaten up and the market does not seem to be discerning between the good and less good companies.” There is no silver bullet to the issues facing the UK economy, where more than 20% of the working age population is economically inactive. “We see opportunities in both the ‘domestics’ serving the UK consumer and business end user, and the many internationally-focused smids. Sue Noffke, Head of UK Equities and portfolio manager of the Schroder Income Growth Fund plc, sees a diverse range of attractive opportunities across both domestic and global-facing UK smids: The opportunity set is broader than this, however. Some of the domestically-focused opportunities in particular look to be pricing in a lot of bad news. Nevertheless, it is always worth remembering that it’s during challenging and uncomfortable periods that opportunities can be most plentiful. It can be argued that UK stocks are cheap for a reason, and economic and political events have clearly undermined confidence in 2022. Importantly, this superior growth potential is now available at a more attractive price. Indeed, the UK has a better track record than the US at delivering long-term success from this part of the market 3. Many academic studies have evidenced the premium returns on offer from smaller companies. Meanwhile, with a longer runway of growth ahead of them than many of their larger counterparts, investing in small and mid-sized businesses over the long term should ultimately deliver superior performance. Starting valuation is one of the most important determinants of long-term investment returns and the current dividend yield of around 3% offered by the FTSE 250 index – the most established group of UK quoted smids – implies a potentially more attractive entry point for investors, and the presence of mispriced opportunities that were not available a year ago. In part, this is because underperformance often leads to more attractive valuations. Past performance is not a guide to future performance and may not be repeated Historically, buying UK smids on weakness has delivered positive long-term results, as illustrated by the chart below.įTSE 250 ex Investment Trusts against FTSE 100 When it has occurred, a period of strong outperformance versus the FTSE 100 has usually followed. Over the past three decades, it has been statistically rare for UK smids to underperform to the extent that they have this year. The acute underperformance of UK smids is piquing the interest of a variety of investors as they look to 2023. In comparison, the FTSE 100 is up more than 6% on the same basis, with the largest of its constituents benefiting from the strength of their dollar earnings, and their perceived safety in a world of uncertainty. UK smids, as measured by the Numis Small Cap plus AIM ex IT (investment trusts) index, have fallen by 21% year-to-date 2. In turn, this has provided support to the share prices of larger, global-facing businesses, whilst the more domestically-focused smids have succumbed to the broader weakness in equity markets globally. These larger companies conduct much of their trade in US dollars and have benefited the extraordinary strength of that currency, which has provided a translational boost to profits that are reported in pound sterling. This part of the market is more domestically-exposed than the FTSE 100, which is dominated by large, internationally diversified businesses 1. While this is normally an enticing blend of characteristics, in general terms, 2022 has not been a good year for UK smids. There are plenty of well-run, innovative and disruptive small and mid-sized businesses in the UK, with market-leading positions in new and emerging industries. They may be less well-known than the household names that form the FTSE 100, but that doesn’t mean they’re not world-leading companies capable of generating superior returns. The UK smids market encompasses more than 1,000 companies. Here, we explore the current outlook for this part of the market and explain how two Schroders investment trusts are positioning to benefit. The extent of the underperformance of small and mid-caps (“smids” for short) is rare and, in the past, such periods have usually been followed by longer spells of outperformance. Investors have displayed a clear preference for the larger, more international FTSE 100 companies. Within the UK stock market, there has been a significant dispersion of returns. This has occurred as inflation has hit multi-decade highs in major economies such as the UK, US and Germany and interest rates have risen sharply. UK equities have been more resilient than many other world markets in 2022.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |