Many smaller businesses have shown tremendous resilience against challenging set of circumstances, points out Eustace Santa Barbara, co-manager of the IFSL Marlborough Special Situations, UK Micro-Cap Growth and Nano-Cap Growth Funds.
Say what you like about Donald Trump, but he knows how to keep the world on its toes. His second spell in the Oval Office has to date proved so unpredictable, erratic and apparently impulse-driven that taking anything for granted has become nigh on impossible.
By way of trivial illustration, the frequency with which I check the President’s Truth Social account has risen exponentially in recent weeks. After all, this is where many of his most seismic wheezes first surface – usually couched in a cascade of capital letters and exclamation marks.
Most of the twists and turns in the ongoing saga of trade tariffs have been revealed via this medium. Even now, with the worst of the tumult seemingly over, logging on remains the stuff of racked nerves.
Much as posts on X are still commonly known as tweets, posts on Truth Social are known simply as “truths”. To say this designation barely withstands scrutiny would be an understatement, but I do believe this much is true: Trump has somehow done UK equities a long-awaited favour.
I say this because one of the key consequences of the tariff farrago has been a decline in investors’ confidence in US stocks. Many of the companies Trump is hellbent on supporting have instead seen their appeal diminished.
Technology titans have been among the heaviest casualties. The collective value of the group formerly known as the Magnificent Seven fell by trillions of dollars in the immediate aftermath of Trump’s panic-inducing “Liberation Day” announcement on April 2.
As a result of the chaos, investors have been reminded of the age-old benefits of diversification. They are once again casting their nets more widely and at last rediscovering markets that have been starved of attention – often undeservedly – for extended periods.
This could be especially good news for the UK’s smaller companies, whose efforts to edge back into the spotlight have been relentlessly thwarted during the past few years. For so long their nemesis, the US has arguably provided a catalyst for their renaissance.
So what are investors who venture back into this arena likely to discover after all this time? Curiously, they might find relatively little has changed – save, that is, for their own perceptions.
Resilience, reality and recognition
There is no disputing that UK smaller companies have been out of favour with many investors for some while. What is open to debate is whether this lack of interest has been in any way merited.
At least at first glance, the bigger picture has done nothing to aid small-caps’ cause. Brexit cast the UK investment landscape in a negative light, with the COVID-19 pandemic and the war in Ukraine subsequently heaping further pressures on unloved stocks.
Domestic political turmoil has also dented the UK’s investment attractions. The Tories managed to rattle through four Chancellors in 2022 alone, consistently undermining lingering hopes of a turnaround, while Labour’s return to office has so far failed to generate anything resembling stability.
Yet the reality is that many smaller businesses have shown tremendous resilience against this unhelpful backdrop. Despite everything, they have maintained their successful operating models, adaptability, appetite for innovation and capacity to respond to emerging opportunities.
There are various reasons why such attributes have been routinely ignored. Foremost among them are entrenched assumptions of the US’s pre-eminence and the fact that these companies tend to be hugely under-researched – meaning investors might never get to hear about them anyway.
This is where diligent stock-picking and direct engagement can make a difference. As managers who specialise in this arena, we meet with hundreds of UK smaller companies every year in a bid to identify those most capable of delivering solid returns and continued growth over the long term.
It is also worth recalling that small-caps, although occasionally more volatile, have a record of outperforming their large-cap counterparts over time. In addition, many smaller companies in the UK are still notably undervalued in comparison to those in the US.
Of course, certainties are rare beasts in the Trump 2.0 era. This is why I have staunchly resisted numerous entreaties to showcase a definitive list of “Trump-proof” stocks. Anyone who deals in full-blown absolutes at this point in human history risks ending up looking slightly foolish, if not thoroughly deluded.
For now, though, it is by no means outrageous to suggest UK smaller companies are closer to being in vogue than they have been for several years. In my view, they have always warranted more attention – and now, finally, they might get it. As Truth Social’s most outspoken user might remark: “MAKE U.K. SMALL-CAPS GREAT AGAIN!!!”
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