Miton UK Microcap Trust plc (LON:MINI) Co-Fund Manager Gervais Williams caught up with DirectorsTalk to discuss Jeremy Hunt’s fiscal statement, greater investment in the small cap market, types of companies that investors are focusing on and increased demand for rare earth minerals and clean technologies.
Q1: Gervais, I’d like to start by getting your reaction to Jeremy Hunt’s fiscal statement?
A1: I think what’s interesting is that I think the UK has been early to recognise that our living standards have actually fallen, that’s partly due to global productivity coming down after the pandemic but also the restriction of energy supplies after the Ukrainian conflict.
I think both factors have led to a setback and most forecasters seems to be forecasting the real household disposable income will decline by about 7% over the next couple of years. That’s the worst outcome in terms of the real disposable income since the 1950’s.
I think we’re gripping the nettle but I think all other major developed economies will have to do the same in due course.
Q2: What will bring about recovery then in investor confidence and do you foresee greater investment in the small cap market?
A2: Yes, I think what’s been interesting is already we’ve seen stabilisation of valuations of government debt, I think they still there may be quite a lot to be issued next year so it could still rise in interest rates in due course. I think the overall factor, we’re looking at a period of stability coming up albeit that I think there will be quite a lot of profit warnings, particularly in the consumer sector early next year.
So, bottom line is I think we’re going to see an unsettled corporate environment but a more settled stock market and the opportunity therefore is to pick out companies which aren’t just able to survive but those which can thrive in the coming markets. I think specifically small caps are very well positioned, not just because they’re small and nimble but the valuations happen to be very low after a very difficult year in 2022.
Q3: COP27 has put the focus back on the race to net zero, and that’s at a time when Russia’s war has brought about a major energy supply crisis. How has that made a difference to the types of companies that investors are focusing on and could you give us some examples?
A3: I think what’s been happening here is that COP has really just recognised the fact that we all need to change our behaviour, reduce carbon emissions going forward but it’s very difficult to get to the finishing post on that, specifically when there’s a shortage of energy, carbon-based energy as well as other forms of energy.
There are opportunities to invest in companies which are developing new forms of energy but most particularly, also, we do need this transition of energy and the valuations of conventional energy companies such as Kistos plc (LON:KIST) which is an energy company involved in the North Sea and in Holland. They’re producing gas, their share price has come down a long way but actually, even after the additional taxes, they’re still standing on very low valuations and stockbrokers are continuing to expect target prices of much higher than the current prices.
I think there will be a move away from companies which are manufacturing at this stage because of the cost of energy so they may be more interested in other companies such as companies involved in financial services, perhaps where they’ve got substantial capital bases, where they can get good earnings. Or perhaps in construction which tends to have a longer lead time and therefore will be able to continue to succeed, even in spite of the uncertainty.
So, they’re not in the Miton UK Multicap fund but Provident Financial plc (LON:PFG) is a good example of a company which is a financial services business, it’s trading close to tangible asset value, it’s yielding about 7 according to market forecasts. So, that’s a good company that we think is well positioned in terms of resilience over the next 6-12 months.
Galliford Try plc (LON:GFRD) is a construction business, it’s still valued at below the cash balances on its balance sheet, most unusual and most particularly, a company which has continued to succeed, it has a very strong order book, it does about 1.5/1.75 billion of sales each year and is paying a good and growing dividends.
I think these are the kind of factors which will drive investor interest because they’re able to not just survive but thrive in an uncertain world.
Q4: If we are going to bring about a successful energy transition, do you see increased demand for companies mining rare earth minerals and developing clean technologies?
A4: Yes, in a word but most particularly, companies which are doing those things and generating cash profits. Whilst I think there will be a period of stability, I think we might even see share prices rise a bit for a while, ultimately, I think markets themselves are going to really struggle to generate a lot of return going forward and we’re going to need to find companies in these areas which are generating surplus cash. The problem with quite a lot of them is they’re relatively early stage, they’re still in the loss-making phases and they haven’t moved into the profit making phases.
So, if we can find those kinds of companies generating surplus cash and well positioned for the future then we think there will be plenty of interest in those companies going forward.
Kistos plc (LON:KIST) is an independent energy company focused on low-carbon, low-impact development and production opportunities across mature natural gas basins.
Provident Financial plc (LON:PFG) is specialist bank for UK adults who are not served by mainstream lenders.
Galliford Try plc (LON:GFRD) is a British construction company based in Leicester, England. It was created through a merger in 2000 of two businesses: Try Group, founded in 1908 in London, and Galliford, founded in 1916.
Miton UK MicroCap Trust (LON:MINI) intends to invest primarily in the smallest companies, measured by their market capitalisation and quoted or traded on an exchange in the United Kingdom.