Diverse Income Trust plc (LON:DIVI) has announced its Factsheet for June 2024.
During June US stock market conditions remained buoyant, such that the collective valuation of the top three US technology mega-caps, the largest companies in the investment universe by valuation, edged towards $10,000 billion!
It is most unusual to have so much finance crowded into such a small number of very large, quoted (i.e. listed on a stock exchange) companies, especially given that history is against them. One of the very few consistent stock market patterns identified by academics is that of the smaller company effect – the smaller the quoted company, the better its return on average.
Betting against history can work at times, but it is a mistake to assume it will work all of the time. Furthermore, one of the problems that often comes with nationalist and protectionist policies (i.e. designed to protect a country’s domestic industries from foreign competition), is that market conditions can switch from an abundance of market liquidity (i.e. investments able to be sold quickly) to chronic shortfalls. When this occurs, then in our view the US stock market will lose its upward momentum, probably for an extended period. Interestingly, at times when it is harder to buy and sell shares (i.e. liquidity is tight), less high-profile quoted companies generating surplus cash, (i.e. ones that provide an income) sometimes have the best opportunities. They can continue to develop by expanding into markets vacated by insolvencies. They can acquire over-borrowed but otherwise viable companies –sometimes for as little as £1 – debt-free from the receiver. In short, when market liquidity becomes tight, the US stock market might not just lose its upward momentum, but at the same time cash generative companies will, in our view, start to excel.
UK-quoted companies, especially those listed on the FTSE AIM All-Share, stand on what we consider to be absurdly low valuations currently. So, if investors do cease to channel capital into US mega-caps, we believe that UK stocks won’t just start to outperform but may do so persistently for years and years to come.
Gervais Williams & Martin Turner
30.06.2024
Diverse Income Trust plc invests primarily in quoted or traded UK companies with a wide range of market capitalisations, but a long-term bias toward small and medium sized companies.
