Speaker 0:
I think one of the key challenges for the UK market is it's been a market which has been out of fashion for two or three decades. Uh, it's a market where there has been selling more uncertainty, and as a result of that, we've actually seen, uh, generally quite wide ranging UK oi selling local selling of the UK stock market, which has actually been, uh, over overshadowing share prices. Interestingly

Speaker 0:
enough, in spite of that, the mainstream market, the Footsie 100 has actually not just held up. But it's actually outperformed many of the international markets over the last 2.5 years. How can that be? I think it's been related to. Actually, international buying of UK equities has risen in the last couple of years as investors are looking to diversify from capital growth strategies towards cash companion strategies. And

Speaker 0:
I think that the scale of that buying is actually offsetting UK domestic selling. So coming back to the problems, the selling has been the problem. It hasn't held back share prices in the mainstream market to date, and in our view, if we do see the selling reducing going forward, we think the UK stock market, the mainstream part of the UK stock market will rise at a faster rate than perhaps people might expect.

Speaker 0:
My own view is that in terms of inflation, the UK is is probably risen at a higher level than than many of the other international markets. It's it's peaking, probably at the moment the Bank of England are advising that by the end of the year it will be between two and 3%. My own assumptions are very similar. Uh, interest rates are probably close to a peak, perhaps have peaked already. Uh, I think we will see inflationary pressures are falling at a faster rate. Perhaps some people think I think interest rates make

Speaker 0:
down a bit faster than people might think. But most particularly, unfortunately, we've still got the lagging effect of all the interest rate rises we've had. So I think economic activity will be suppressed. I think companies will find it harder to raise capital, not just because interest rates have been raised, but also the banking sector has been under a shortage of deposits. Uh, so the net effect is I think, uh, it's it's a tough time for Corporates. Uh, uh, I don't think it'll be easy.

Speaker 0:
Our view is that the UK is heading for recession in the short to medium term. Um, we think that actually, it's an effect of the rise in interest rates, which have been quite substantial. Um, we think it's the effect of slowdown in bank lending, which has been related to, uh, the absence of deposits.

Speaker 0:
And most particularly, we also think that actually, quite a lot of investors are becoming more cautious. Quite a lot of, uh, consumers are holding back, So I think we are looking at a period when I think economic uh, there will be an economic slowdown. I think there will be, uh, a period of perhaps profit reduction. Uh, I think some companies may become imperilled and there may be some more corporate failures.

Speaker 0:
I think the current market volatility, there'll be some winners and losers. Uh, specifically, the winners will be those companies which tend to have very strong balance sheets.

Speaker 0:
Uh, companies which are generated surplus cash. Uh, they can withstand, uh, difficult trading conditions. They can continue to invest at a time, perhaps when other businesses are vacating markets because they've failed or withdrawn uh, so I think they'll be the winners. Unfortunately, I think there will be losers as well Disproportionate losers. I think if you're unlucky enough to have a stretched balance sheet, if you run out of cash, if you happen to be imprudently financed Unfortunately, I think there will be some companies which, uh, don't just, uh, suffer badly. But I think some may actually fail.

Speaker 0:
UK stock market is special. In a way, um, the key issue is that actually in, in contrast to the economy, which is very, uh, similar to many international economies, actually, the stock market is very much driven by relatively capital intensive businesses, which generate a lot of their return through compounding of income good and growing income.

Speaker 0:
Uh, that's very different from most other stock markets in the world. We think that, actually, as we move beyond the globalisation as we move beyond this period of low inflation to a more, uh, sort of period where inflation may fluctuate, there may be, uh, increased, uh, inflation in future, off and on. Then we think that actually, this ability to generate good and growing income will become a more populist strategy. And we think actually, that future is going to drive a lot more interest in the UK stock market as opposed to other global stock markets.

Speaker 0:
The opportunity for the UK, uh, is is very exciting. But the government generally worries about the fact we haven't been investing in the UK economy at a at a sufficiently fast rate. And one of the reasons, in my view, is actually the cost of capital cost of actually access to investment funds in the UK is disproportionately high compared with many other international markets. Valuation of the UK stock market appears to be lower than many of the international stock markets. Uh, I think this is a moment when actually, the UK government really should be thinking about how they can step in to

Speaker 0:
prove the cost of capital, to make it easier for companies to raise capital for making it easier for them to find projects which do produce a serious cash payback. And so, from that point of view, it's quite a few newspapers have been discussing the possibility of of the ISA market the the ISA investors being obliged for the next three years to invest 80% of their capital in UK quota companies.

Speaker 0:
My own view is that will make a very significant difference to the valuation of UK great companies. I think it will greatly improve the cost of capital, uh, and make, uh, boost investment. Uh, I think it will be a a really very significant, uh uh, policy development. And for the government, bizarrely, it costs nothing at all.

Speaker 0:
I think the outlook for the UK market is really interesting in terms of the longer term prospects. Specifically, it's been out of fashion for 20 or 30 years. So there's most investors have actually allocated their capital into more interesting areas, perhaps some of the international markets, some of those, perhaps with faster growth prospects. Some of those, perhaps, uh involved in investing at a faster rate, albeit their own running cash flow negative models that's been very successful in the past. But if we do have inflation, if inflation becomes more of a perennial

Speaker 0:
problem, then you're going to need to invest in companies which generate surplus cash. As it happens, the UK stock market is really very well positioned in terms of having a very large number of companies which are generating surplus cash. Many of which are paying dividends, and as a result, it's more resilient if we get uncertainty if we get, uh, global recessions. But most more important, importantly, it's also in a position where those companies can continue to invest even as other companies, uh, withdraw even as other companies fail. And it's that opportunity set which we think is

Speaker 0:
going to drive a long term asset allocation. Change away from, uh, having such a heavy reliance on capital growth strategies towards cash compounding strategies where I think the UK leads. Uh, compared with many of the other global stock markets, I think the UK stock market is on the verge of a multi decade period of out performance. Uh, it sounds completely ludicrous. It's not about the quality of the UK economy. It's not about our politics. It's about the nature of difference. The UK market is special, and I think that specialness will come to the fore.

Speaker 0:
The kind of companies which we think will actually continue to thrive in this market aren't just companies which actually have a strong market position or are continuing to be able to hold up in terms of demand and servicing their customers would be think there will be Companies which actually specifically are are seeking to deliver outstanding levels of service to customers.

Speaker 0:
Uh, the problem is, as customers as can are offered a wider range of services at lower and lower prices. They are likely to choose a lower price supplier other than if they are deli being delivered outstanding. Not good, but outstanding levels of service we tend to select for companies which actually are delivering for outstanding levels of service. It doesn't prevent them from having margin pressure, but it reduces the risk.

Speaker 0:
Secondly, we also believe that companies which are quoted with surplus cash generating surplus cash will be able to acquire assets from the receiver. We think unfortunately, you know those businesses they may have been over leveraged and and may have been businesses which have failed in their original form. But they are underlying These can be businesses which are cash generative and can be bought

Speaker 0:
debt free from the receiver at relatively low valuations and can then go on to generate additional cash for the acquirers. We think that companies which are able to acquire assets from the receiver particularly quoted companies where they can use institutional capital if they need, it will be a key, a key area of, of, of, of, of success in the coming years.

Speaker 0:
Uh, particularly looking for companies which are able to generate sustained sales. Uh, many of the areas which have done very, very well during the last 20 or 30 years during globalisation uh, they they're probably more vulnerable. Some of the service sectors in those areas, some of the consumer sectors which like more anxious about those, uh, interesting enough areas which have been overlooked could be much more resilient. That includes some of the manufacturing sectors, which we think could be quite interesting. But it can also include, uh, areas which, perhaps are are difficult. Uh, in terms of valuations,

Speaker 0:
some of the financials are quite capital intensive and can generate, uh, premium returns. We also think some of the mining and even some of the energy companies can actually be surprisingly good investment. So So from that point of view, we think there's quite a wide range of companies to select from. But most particularly, uh, it will vary over time because the economy will will fluctuate.

Speaker 0:
I think the key catalyst. It's probably gonna be two of them. The first is I think if we see a reduction in selling of UK oiks, I think that will itself will mean that actually, the international bars will start to drive the 100 up. Uh, but we'll also see that, uh, lesser selling pressure be offset, hopefully by, uh, some ongoing buying pressure which will drive some share price and recovery. And when we see the valuation difference between the mainstream companies and the small companies, we could see that coming through and quite significant, uh, out performance of the smaller end of the market.

Speaker 0:
I think the second feature which will drive interest into smaller quoted companies specifically it is that actually, they have the opportunity to thrive at a time when there is a global recession. It doesn't mean they're immune from the economic cycle. It just means that they are in some cases more well, better positioned for that that period of of of challenge. And if we've got companies which are not just succeeding at thriving, where their share price valuations do look overlooked and unfortunately, there will be, we suspect quite a few takeovers. If the share prices don't recover as rapidly as we would like to see.

Speaker 0:
So the UK Small Companies fund actually has been less resilient than I'd hoped. The share prices have come down further than we had hoped. Uh uh. It's come down along with the aim to aim all share index. So So it's been very much a feature of the market. Even the companies which have some income have. Actually, in many cases, the share prices haven't been as resilient as we might have expected. So what we've really seen is ongoing, uh, wide ranging selling

Speaker 0:
not just in the small cap sector, but across the UK stock market. Overall, uh, we haven't seen much buying coming in, So the marginal sellers have been directing share prices. Share prices have, in many cases been very weak. Even companies which succeeded in many cases, their share prices haven't gone up much because they've got this sort of overhead, uh, sort of selling pressure across the market. So it's been a very disappointing period for for the fund,

Speaker 0:
as in 2019, when there was a real period of uncertainty around Parliament, about the gridlock about whether we'd have a chaotic or an unplanned exit to, uh, the the the Brexit arrangements with the EU. Uh, again, we saw the underlying share prices fall, uh, at the bottom end of the market. This small and micro cap stocks, particularly under performing that period. Uh, but that was subsequently revived, not just after the reelection of a

Speaker 0:
AAA government with a majority, but most particularly after the pandemic. Uh, we saw that many of these smaller quota companies are able to grow when the world's not growing. Many of these companies are able to thrive even at a time of a global recession. And that brought new investors in and, given their valuations, started off at such a low level. Uh, the underlying fund itself had an abnormally strong period of performance. Uh, from March 2020 onwards.

Speaker 0:
Well, the amazing thing about the small quoted sector in terms of opportunity is they're just so numerous. There's vast numbers of companies. There's almost as many companies quoted below 100 and 50 million as there is above. In the UK market, it's a it's a it's a very vibrant universe. It's a universe which isn't very well covered by a

Speaker 0:
our managers, professional managers tend to be more involved in the midsize and small caps rather than the smaller the micro cap. So it's a very overlooked universe. Uh, the opportunities are to find companies which are on the verge of generating substantial cash payback on previous years of investment.

Speaker 0:
And if we can invest at that time period, and if they succeed, they don't just generate surplus cash. But then, of course, the need for further funding hopefully drops away. Specifically, they can then use the cash to invest at a faster rate. They can invest in, uh, paying dividends. They can make acquisitions. They can even buy back their share.

Speaker 0:
Uh, the risk war ratio after they start generating very substantial cash is very attractive. So we often liken many of the holdings in the UK Small Companies fund to immature income stocks. These are companies which are just moving into that cash surplus area. Uh, and when they do so, uh, clearly their share prices can appreciate significantly