Miton UK MicroCap Trust: Outlook for H2 2022

Gervais Williams

Miton UK MicroCap Trust plc

Generally, the decades of globalisation were marked by abundant ‘supply’ of goods and services, often from low-cost economies. Whenever the economy slowed, central banks just injected extra ‘demand’, given that there was ample headroom in ‘supply’. During the 2008 financial crisis for example, the Bank of England was able to cut interest rates from 5.75% to 0.5% to engineer a recovery. Since 2008, the Bank of England has kept the economy going by adding yet more ‘demand’ using quantitative easing whenever necessary. All this has worked out well for investors, because ‘demand’ has been more than satisfied by ‘supply’, so inflation never took off.

An anxiety about our reliance on long-distance supply routes eventually initiated a change of trend. The logistical problems during the global pandemic further amplified these concerns. When Russia invaded Ukraine in early 2022, the application of sanctions underlined the risk of relying on remote suppliers yet further. Meanwhile, central banks injected yet more ‘demand’ during the pandemic to keep businesses from failing. The net effect is that ‘demand’ now exceeds ‘supply’, and inflation has returned. Insufficient ‘supply’ is a nightmare for central banks, as inflation forces them to suppress ‘demand’ to bring it into balance with ‘supply’, via a recession caused by increased interest rates.

During the first half of 2022, as the gravity of these implications became evident, the valuations of many bonds and equities began to fall away. Going forward, as ‘demand’ declines, we now expect corporates to begin running short of sales, with potential price wars as they seek to hang onto customers – economic recessions are normally associated with weakness in both corporate sales and margins. Cash-flow negative businesses are particularly vulnerable at such times, as any shortfall in sales and margins shortens the time before they run out of cash. Alongside, high indebted businesses also risk insolvency due to rising interest rates and falling profits.

Interestingly, listed small-cap companies may have the advantage during recessions especially if they are already generating surplus cash. By acquiring viable but formerly over-indebted businesses, debt-free, at knock-down prices from the receiver, they can boost their future cash surpluses. Sometimes these kinds of deals can deliver ‘transformational’ uplifts for small-caps.

The bottom line is that the UK’s heritage of inflation over the last century means that the UK stock market is distinctive in having a vibrant universe of quoted small and micro-caps. The key point is that immature businesses can sometimes sustain growth even when the global economy is in recession. Furthermore, as noted above, quoted small and micro-caps can sometimes generate transformative returns on top by acquiring businesses from the receiver.

With global interest rates rising, we believe that economic conditions will become tougher. But alongside we also believe that these economic trends could favour the Miton UK MicroCap Trust. Indeed, with the unsettled economic and market trends, we believe there are likely to be few assets that perform as well as UK-quoted small and micro-caps. Furthermore, given that so few institutions have weightings in UK-quoted small and micro-cap stocks, we believe that the new trend might be reflected in renewed capital allocations and outperformance that could surprise in terms of its scale and duration.

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Risks

The value of investments may fluctuate which will cause trust prices to fall as well as rise and investors may not get back the original amount invested.

Trusts that have a strong focus on a particular country or region can carry a higher risk than those with a more diversified portfolio.

Investment in smaller companies is typically higher risk than investment in larger companies. Shares in smaller companies can experience greater levels of volatility.

Future forecasts are not reliable indicators of future returns.

IMPORTANT INFORMATION:

For Investment Professionals only. No other persons should rely on any information contained in this document.

Whilst every effort has been made to ensure the accuracy of the information contained within this fund insight, we regret that we cannot accept responsibility for any omissions or errors. The information given and opinions expressed are subject to change and should not be interpreted as investment advice. Reference to any particular stock or investment does not constitute a recommendation to buy or sell the stock / investment.

All data is sourced to Premier Miton unless otherwise stated. Persons who do not have professional experience in matters relating to investments should not rely on the content of this fund insight.

For your protection, calls may be monitored and recorded for training and quality assurance purposes.

A free, English language copy of the trust’s full Prospectus, the Key Information Document and Pre-investment Disclosure Document are available on the Premier Miton website, or you can request copies by calling us on 01483 306090.

Financial Promotion issued by Premier Miton Investors. Premier Portfolio Managers Limited is registered in England no. 01235867. Premier Fund Managers Limited is registered in England no. 02274227. Both companies are authorised and regulated by the Financial Conduct Authority and are members of the ‘Premier Miton Investors’ marketing group and subsidiaries of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.

006852/140622

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