UK small and mid cap focus - Finding opportunities for future growth

Guy Anderson, portfolio manager for The Mercantile Investment Trust, explains why investors can still find lots of value outside of the FTSE 100, despite the uncertain domestic outlook.

Go to the profile of Guy Anderson
May 15, 2019
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The short-term outlook for the UK economy remains mixed, with Brexit uncertainties a negative factor. On the positive side, however, UK unemployment is near to a 44-year low and, combined with an employment rate of 76%, this is driving wages up and increasing consumer spending power. Although political uncertainty is currently suppressing consumer confidence, as and when this dissipates confidence could improve and thus provide a platform for an upturn in domestic economic growth.

The generally weaker global economic outlook and unpredictable trade politics are also likely to be factors for UK investors over the next year: We are already seeing slower estimates for global growth, driven in part by the risk of a trade war between the US and China. Only time will tell how this saga plays out, but currently the “low growth rather than no growth” environment does at least provide a sufficiently robust backdrop for earnings growth in companies outside of the FTSE 100, many of which are at earlier stages of their business lifecycles.

We focus on the attributes of individual businesses to unearth and invest in companies that are both fundamentally robust and have the potential to be long-term winners, even if the immediate geopolitical and economic climate is tough. We are always poised to take advantage of strategic opportunities as they arise and the current market environment is generating opportunities to buy potential long-term winners at attractive prices.

In the IT software & services sector, for example, we believe industrial software business Aveva is a potential winner that could experience a step-change in growth as industrial customers begin to embrace the fourth industrial revolution—an era of smart technologies that will create massive change across industries.

We also find opportunities in sectors that are undergoing significant change in consumer behaviour. Such as the trend away from DIY towards “do it for me”, which is benefiting companies such as Grafton—a builders’ merchant that has ambitious growth plans for its trade-only Selco warehouse format.

Guy Anderson is Head of UK Mid and Small Caps and manager of The Mercantile Investment Trust plc.

Source: Office for National Statistics, Employment in the UK: March 2019

The companies above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell.

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Go to the profile of Guy Anderson

Guy Anderson

Fund Manager, The Mercantile Investment Trust plc, J.P. Morgan Asset Management

Guy Anderson is portfolio manager of The Mercantile Investment Trust within J.P. Morgan Asset Management's UK Equity team.

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