Miton UK MicroCap Trust plc (LON:MINI) fund managers, Gervais Williams and Martin Turner, provide a portfolio update for June 2022.
Stock markets have been unsettled over 2022 and were weak again in June. Over recent months, the accelerating rise in short term interest rates are expected to slow global demand, and potentially initiate a period of demand destruction, via a global recession. If demand moderates, we fear there may be a decline in corporate profitability, either due to a competitive price war to retain customers, or due to sales disappointments.
Despite giant challenges for stock markets over recent decades, generally speaking, financial conditions haven’t deteriorated as seriously as might be expected for any length of time, due to major liquidity injections from central banks and governments. In contrast with this slowdown, companies may now be facing the most severe cash shortage for three decades, given the ongoing rise in interest rates, and the price wars and sales disappointments they may precipitate.
One of the advantages of the Trust’s strategy is that the portfolio holdings selected are those that look set to generate surplus cash imminently, rather than those that are anticipating absorbing cash over the coming years towards a potentially valuable outcome. During unsettled market conditions, companies that are listed on a stockmarket also have the potential to acquire other businesses – that may still be viable but have too much debt – at lower valuations and debt free, from the receiver. In the case of micro-cap companies, sometimes these transactions can help to scale up the potential of the combined businesses dramatically.
The strength of the US dollar can favour the very largest companies on the UK stock market because often these large UK companies derive the majority of their earnings from overseas. Meanwhile, those companies that are listed on the Alternative Investments Market may remain overlooked, and interest has been further tempered by the domestic political circus.
Currently, we believe a valuation gap has developed between the mainstream companies and some of the smaller market capitalisation companies. The same pattern has sometimes happened in the past. There may be any number of reasons that catalyse a period of performance catch-up for the Miton UK Microcap Trust. When this potential is combined with all the other advantages of the strategy, we consider the Trust’s prospects continue to remain attractive, despite the unsettled stock markets, over both the short and longer term timeframes.
Gervais Williams & Martin Turner