Abby Glennie, deputy head of smaller companies at fund manager Abrdn
The opportunities are there and British businesses are doing their bit to keep the UK’s growth engine running. But support measures to boost share ownership and IPOs could add some much-needed oil to the machine.
The growing awareness that action needs to be taken to boost UK economic growth and revive IPOs has been striking. Peel Hunt’s excellent recent report on the headwinds for the FTSE SmallCap Index is a case in point.
Despite clear challenges, long-term opportunities for the UK’s smaller businesses persist and, if we dig beneath the surface, there are some strong stories to tell.
In fact, some of our key holdings, such as, 4footprint and Jet2have shown good growth during a turbulent couple of years for the markets, with Jet2 trading particularly well in tough consumer times. Ashtead Technology, evolution, Hollywood Bowl They are other success stories.
The key is to see strong earnings growth and resilience. That’s why I think the “recession” that’s been talked about for the past 24 months has been a bit irrelevant, and more recent data has challenged the narrative.
Interestingly, a key takeaway for me would be that while UK GDP growth tends to compare unfavorably with other regions, there are many high-quality UK-based companies still reporting strong results.
And when looking at UK funds more broadly, it’s worth noting that if you look at the funds’ earnings growth, plus dividend income, the total returns can take a much more interesting shape.
Recession or not, if you have no investment in the UK space and get in now, there are tempting valuations for long-term stock pickers, but they are not enough on their own.
Jet2 is an example of a small UK-listed company that “trades particularly well in difficult consumer times”.
Policy reforms have at least signaled positive intentions, with the UK proposal being a clear example, but I wonder if the extra £5,000 allocation would really be enough to turn the tide.
What we really need is for more action to be taken at a regulatory level, to make the UK more competitive. Stamp duty on UK shares is a case in point. We believe removing stamp duty on UK shares and UK domiciled investment trusts could be the biggest boost to UK share ownership in decades.
Private investors seem to agree. Research conducted last month by Interactive Investor among 2,000 of its website visitors found that 82 per cent of respondents thought “stopping the stamp” on UK shares would encourage greater investment in listed companies. in the United Kingdom.
The impact of a reduction or removal of stamp duty on transaction volumes could be significant. And if stamp duty were taken into account, investment projects whose expected rate of return is less than the cost of capital in the presence of stamp duty would not go ahead.
The investment would not occur even if it had been worthwhile without the distorting tax.
Stamp duty also has a distorting impact in other ways. Take UK domiciled closed-end funds, also known as investment trusts, as an example. Retail investors pay “double” stamp duty, once when they buy the unit trust’s shares and again when the fund manager makes a UK purchase within the fund. As a manager who has the privilege of managing both closed-end and open-end funds, I find this both disconcerting and unfair to investment trust investors.
More generally, smaller UK companies should be a valid component of a well-constructed portfolio – the opportunities are there. While patience, as always, is key, if we are serious about turning the tide we also need support to keep the UK competitive.
British businesses are doing their bit to keep the UK’s growth engine running, but measures to support share ownership and IPOs could add some much-needed oil to the machine.
Abby Glennie is Abrdn’s deputy director of smaller businesses.