With Brian en route back from his winter escape, it’s me again this week. 
As we approach the end of the year, the spotlight turns to UK smaller companies – a sector that has quietly but consistently delivered some impressive results over the past few years. Since the global market lows of September 2022, UK small caps have enjoyed an impressive rally, up 30%, with some standout performers far exceeding this average.
The FTSE Small Cap (ex Inv. Cos) chart for 2024 tells a tale of climbs and corrections: a strong rally into May, a plateau over summer and a return now to those May levels. Depending on your state of mind, you could contrive a cogent argument for this index being about to soar or plummet. Better simply to look for a signal either way. The optimists require a quick move up through 6000, and the pessimists will be satisfied by a break down through 5600.
If this index is a decent barometer of confidence in UK plc, it is fair to say that confidence drifted in recent months, and this was confirmed by a number of economic surveys for November.
If that means UK domestic equities are both cheap and unloved, it makes it a great market for stock pickers.
This sense of drift is not just a UK problem. European smallers look dire at the moment, save a rabbit being pulled out of the ECB hat in the weeks ahead. In common with the UK is overwhelming debt sucking oxygen out of their economies.
Despite the immediate doubts, UK smallers had a decent year, up 10%, twice as great as Japanese and Asian smaller companies, with Europe stagnating. This was also better than the FTSE 250 and 100 indices, up 6 and 7% respectively. This is encouraging. Clearly there are buyers for cheap and high-quality UK smaller companies, as evidenced by the merger and acquisition activity this year.
The only global peer group to outperform the UK was US smallers, up around 20%, depending on your preferred index. It is important to understand the differences. This US group was pulled up by a more widespread bull market and investor mania. The UK attracted buyers because there is a broad selection of lowly priced, overlooked, high quality businesses.
What others are saying about UK small caps:
Octopus Investments: “UK small-caps offer once-in-a-cycle opportunity”
IFSL Marlborough: “UK smaller companies are at the forefront of long-term structural growth trends.”
Abrdn: “UK small companies are the cheapest and best-performing stocks in the world”
For those keen to explore the best funds, go to our unique Best Funds by Sector tool. You can choose funds with momentum over 3 and 6 months and include investment trusts if you wish. And don’t forget to set up our unique Stop Loss alert for your fund in My Portfolio – for those who haven’t used our Stop Loss feature yet, here is a guide.
Staying on smallers but shifting east, Japanese smaller companies, a long-term favourite of ours, have begun to pick up pace relative to the Nikkei 225. Since the end of October, they’ve risen around 7% and we’re eyeing an opportunity to increase our weighting in this area across some of our Discretionary Portfolios in the coming days. When Japanese smallers get going, they can move fast. Despite the recent rally, they are still at a wide discount to their large-cap peers. The corporate governance reforms announced in 2023, which breathed new life into Japanese equities, are still working their way through the system. Small caps will naturally feel the full benefit with a lag, but it could be significant when they do.
It’s been a broadly positive week in markets across the major indices with some surprising performances. Leading the charge is the DAX in Germany, hitting record highs and climbing around 4% for the week, all while dealing with a collapsing government. Speaking of which, over in France, despite another collapsing government with the no-confidence vote against Barnier and headlines warning of a "sell-off" in French stocks, the CAC 40 is up 2.5% for the week.
How’s that for resilience? Might it be an assumption that yet again the ECB will come to the rescue and paper over the cracks?
Finally, a quick word on our Dynamic Global Portfolio, up for review this month. Over the past six months, the portfolio has delivered a solid 9% return and is up an impressive 1,291% since inception which is 2.3x the index. True to the nature of this portfolio being global, it can bring in areas with momentum but in a nicely balanced mix. The next period sees a US large cap, a US small cap and a Japan fund in there, following its strong performance since October.
Have a lovely weekend,
Joe