Primary Opportunities Outlook 2020

10th January 2020

Lots has been written on the election results’ impact and potential impact for UK equities. We do not propose to compete with these other than to concur that an end to uncertainty over the UK’s relationship with the EU and an expected striking of a trade deal with the EU are positive for UK equities, which have been badly hampered by the political uncertainty since the referendum in 2016. There will clearly be bumps in the road as, if we learnt nothing else over the past few years, politicians are happy to take negotiations down to the wire, whereas those running the economy, would simply not take brinkmanship to anywhere near those levels. As businesses and investors, we value certainty and clarity and can then set our stall out accordingly.

Our focus as always is on the primary markets. Companies now have much of the certainty they need to carry out the investment and fund raisings to help grow their businesses. That is not to say all companies held back in 2019, but we are aware of many that did and we anticipate seeing a significantly higher level of companies seeking to access equity capital in 2020. Since the referendum in 2016, we have been cautious on UK domestic stocks, largely shunning stocks whose sole focus are UK consumers. However, in more recent months, with the UK continuing to lag other developed markets, the valuation differential becoming more extreme and with our base case expectation of a Tory majority, we began increasing our exposure to UK domestics. Recent names added to the portfolio include the online booking platform, Trainline, WH Smith, building aggregates supplier Breedon, and housebuilder Bovis Homes. SCS, the sofa and flooring retailer was also added at what we consider to be very depressed levels. All were purchased via our primary opportunities process at discounts to the prevailing market price and all trade at levels where we see further upside, despite all performing strongly of late and most notably since the election.

Much has been written about the dearth of IPO’s in 2019. It has undoubtedly been quieter than recent years, nevertheless there have been some interesting and exciting opportunities at the small cap end where we have participated in seven IPO’s. All are trading at levels above their IPO price and we consider them to be seeds that we have planted in 2019 that will continue to grow in 2020 and beyond. In 2020 we anticipate a busy IPO market and the re-opening of the IPO market at the larger end. London remains a world class financial centre and an attractive exchange to list.

In the few days since the election result, UK equities and particularly the mid cap FTSE 250, have rallied hard – a relief bounce on the belief there is a pathway for the political grid lock to end and a pro business government (at least compared to a Corbyn led Labour government). It is unsurprising to see the greatest gains coming from the larger UK focused names – banks, retailers and housebuilders, that populate the FTSE 100 and FTSE 250, these being the most liquid names and the easiest way of buying into UK domestics. In 2020, it is our expectation that small caps are due to outperform given the latent value and underperformance over the past few years. It is certainly an area of the market that has some catching up to do. We anticipate that as more money is allocated to the UK by investors, at first this money goes to buy the most liquid names, but as the valuation gap between large/mid and small caps diverges further, money will filter down to the small caps, which are less liquid, and prices will squeeze higher and continue to rise as investors take note of the returns available in small caps. The Fund currently has a near 30% weighting to small caps, most of which we term ‘large small caps’. These are companies with a market cap in excess of £200m and are well positioned to benefit from a small cap rally when it comes, whilst allowing us sufficient liquidity to sell our holding should the need arise.

Which leaves me to conclude by wishing all our investors and prospective investors a happy Christmas . 2019 has been eventful and 2020 we anticipate being one of our busiest for primary opportunities since the great financial crisis. We are ready and raring to go.