Last month we said of the FTSE Small Cap index (ex ITs) that: “The optimists require a quick move up through 6,000, and the pessimists will be satisfied by a break down through 5600.” Neither have occurred. There has been much for investors to digest in recent months, domestically and globally, politically and economically. The net result is a stalemate in the UK small cap index, in common with others around the globe. Markets have adopted a “wait and see” approach ahead of Trump returning to the Presidency this month.
Yet UK small caps on average did just fine in 2024, better than other UK indices, and with only the major US indices with markedly better growth. In the very short term, one way for you as a UK investor to approach the present torpor is to open positions in your preferred stocks, perhaps half your normal allocation until the small cap index breaks up. And whilst the indices overall may not be rallying hard, on SCSW we focus on special situations and are seeing many small companies starting to bounce. Our NAPS include some we like.
Back in July we highlighted a world-wide reaction by what we euphemistically call “The 99%” against long established centralist political parties, and the recent win by Donald Trump is another manifestation of the “All Change” theme. We said this trend would lead to Economic Nationalism, or National Capitalism. It means capital being re-patriated from overseas and reinvested into domestic markets. For example, the UK government will probably require institutional pension funds to invest a minimum into certain classes of UK investments, particularly those with a more domestic focus, not global conglomerates - one reason Liontrust is featured as a NAP.
Repatriation by national authorities worldwide feels inevitable. US markets, buoyed by American Exceptionalism, ignore the inconsistency of Trump policies e.g. he can’t beat inflation, as he promised his voters, if he also puts hefty tariffs on imports, which will push prices up, and sends migrant workers home en masse, creating a labour shortage and even more upward pressure on inflation.. This repatriation will likely lead global investors to offload overvalued US equities, where they are heavily over-invested. Watch this closely.