2018 hasn't been great for British companies. Having hit an all-time high in January, the UK stock market has fallen some 10% in the past few weeks, having failed to bounce back from the global stock market correction in early February.
Slow growth, compounded by Brexit uncertainty has been weighing on companies for some time now and an already struggling retail sector is now showing signs of stress. Over the past three years we have seen a raft of British retail company share prices collapse:
Carpetright shares are down from 600p three years ago to just 40p today, Mothercare has seen a similar plunge with its share price down from 295p to 17p over the same period, Laura Ashley – which has issued its third profit warning of the year – had shares worth 35p in 2015 but which are now worth 4.58p, Debenhams reported disappointing Christmas trading and its shares have fallen from 95p to 23.5p in three years, Dixons Carphone shares have fallen from 500p to 175p in the same time frame…… the list goes on. And the Moss Bros profit warning today, which has resulted in its shares falling some 30%, is perhaps just proof that this is now a trend, not stock-specific.
The UK consumer is obviously struggling. Could this spread to other parts of our economy? Or has the sell-off gone too far and is this a buying opportunity?
Investors seem to think the former if asset allocation figures are anything to go by. According to the Bank of America Merrill Lynch Global Fund Manager Survey for March 2018, UK equities are at the bottom of the pile when it comes to asset class allocation versus historical norms*. The asset class is very much unloved.
However, for the contrarian investor, it could perhaps be the latter – especially if they are willing to take on some extra risk and invest in our very smallest companies.
Ed Heaven, from Montanaro Asset Management (the Montanaro Income fund is on the Chelsea Selection), argues that smaller companies rather than larger companies offer the best prospects right now. “The £500 million withdrawn from UK small-caps in 2016 has yet to return,” he said.
Investors flocked to larger companies with US dollar exposure after the EU referendum and, today, they are so unpopular that they are sitting on their widest discount since 2001 – in simple terms they are some 29% cheaper than their larger company counterparts.
So for anyone looking for a UK bargain, perhaps this is the place to look. Some funds on the Chelsea Core Selection you may wish to consider are Franklin UK Smaller Companies and Marlborough UK Micro Cap. The wider Chelsea Selection also includes Elite Rated LF Livingbridge UK Micro Cap and Elite Rated Marlborough Special Situations.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius's views are his own and do not constitute financial advice.