Miton UK MicroCap Trust plc (LON:MINI) Fund Manager Gervais Williams caught up with DirectorsTalk to discuss the effects on unicorns such as Gamestop, changing market trends, the micro-cap advantages and what sectors investor should be considering.
Q1: Over the last week, we’ve all seen the effects of Reddit communities that they’ve had on stocks and crypto but to what degree should investors take comfort from the resilience of unicorn share prices in 2020?
A1: Well, it was a tough year last year, we had a global recession and, in a way, we’re still recovering from that now. A lot of these quite fast-moving shares have done really well over the last couple of years, if anything the stimulus has been injected further. Yellen announced yesterday that the new administration will start to spend what’s called the Treasury General Account, it’s a big amount of cash which the US government has got, that’s probably going to boost asset prices further.
So, if anything, it’s quite interesting, Tesla’s quite close to new highs, even those companies coming in and out like Gamestop have been volatile but most particularly, there’s probably some momentum to the markets in the short term but we should always remember at some stage the market trends will radically change.
Q2: Yesterday, there was a big step up in the core inflation in the EU, is that the kind of issue which could lead to change of market trend?
A2: If we look back, really, over the last 30 years, general inflation has been benign and it’s been a period when investors have been making money in growth stocks, as we’ve heard, but also in bond proxies, the Unilever’s of this world. If the growth stocks peak out, you can get into proxies or vice versa.
The problem with that is if inflation did become more significant, that strategy would not work so well. I think it’s quite a worry really, it’s not so much that yesterday’s figures from the EU but I’ve been noticing that the metal prices have been rises generally, food prices have been rising generally, quite a lot of energy prices, the oil price has been up recently.
So, if anything, if this is a pattern then that would make future market returns much more patchy.
Q3: If market trends were to change, wouldn’t that make it more difficult for micro-cap strategies like the Miton UK MicroCap Trust?
A3: The whole point of micro-caps is some of their share prices have gone up over recent years as well but if anything, the key issue about micro-caps as opposed to the mainstream caps is that if the world were to enter a period of slow growth or no growth, micro-caps can often grow when the world’s not growing, their younger businesses so they can grow when the world is growing.
On top of that, sometimes if companies are going bust and such like, the great advantage of being listed is you can acquire an asset from the receiver. Big companies can do that too but sometimes small companies, clearly micro-caps, can do deals which are transformational to their prospects.
Ultimately, when they come right, the whole point of micro-cap share prices is if they come right, they can go up by much greater amounts perhaps than the mainstream stocks.
So, my own view, actually, if that micro-caps have much more substantial recovery potential than most other parts of the UK market after Brexit. So, if anything, we’re quite upbeat generally about micro-caps, not just because they’re a bit overlooked but also because if the market trends were to change, we still think they would have plenty of upside.
Q4: Now, I know you touched on this earlier but with all that in mind, what sectors are you looking at? What sectors would you be considering right now?
A4: We’re opened minded to all sectors, we’re very driven by cash, cash paybacks, substantial cash paybacks and we’re seeing certainly quite a lot of financials are in a position where they can generate very substantial cash paybacks in certain changes and trend.
Most particularly, we would argue some of the metals companies, some of the mining companies are very well positioned, some of the energy companies, these are very overlooked sectors. Although people worry about the environmental footprint and things, if anything they too need to invest to generate lower carbon emissions going forward. Actually, many mining companies are more well developed in terms of sustainability to many of the other quoted companies out there.
So, we think these sectors are particularly well placed, not just to continue to see recovery but particularly if inflation were to come through then their profits would rise faster than people would expect.
Miton UK MicroCap Trust intends to invest primarily in the smallest companies, measured by their market capitalisation, quoted, or traded on an exchange in the United Kingdom at the time of investment.