Investing across the electoral cycle, that is the next 5 years and beyond, UK smaller companies are particularly compelling, spurred on by a government which is committed to putting a lot more money into the UK economy. We should expect this spending to be broadly based (reflecting new Tory voters, and their expectations), giving a lift to confidence which is vital for a robust domestic economy.
Overseas investors are probably under-invested in the UK since 2016, and they will also have increased confidence in the UK as a destination for their money.
Look out for “Thatcherite” initiatives on a 12-month view – providing benefits for the largest number of people, not just the few. That might well be (must be?) a mantra over this electoral cycle, or Boris will not go down in history, he will just go down.
Valuations are also undemanding amongst small caps; there are pockets which are even cheap.
Clearly there does appear to be a decent opportunity in UK smaller companies, but it is global risks that are our greatest concern. In particular, the prevailing complacency despite a uniquely over-valued US stock market, a unique volume of debt, a unique mountain of bad quality debt etc etc. – and we will write much more on this in the next TopFunds Guide.
Of course we also do not ignore the risk that the trade negotiations with the EU could yet upset markets – though that is probably a matter for later in 2020.
In conclusion, it is not a time to be gung-ho and throw cash wholesale into the markets. But taking a longer view it is justifiable to reduce cash weightings a bit, and buy UK smaller companies.
Precisely how we do this will vary from client to client, and we will be in touch early in 2020 to go through this.
