Abby Glennie, deputy head of smaller companies at fund manager Abrdn
Opportunities are there and British business is doing its bit to keep the UK growth engine going. But supportive 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 reignite IPOs has been striking. The excellent recent report from Peel Hunt on the headwinds for the FTSE SmallCap index is a case in point.
Despite clear challenges, the long-term opportunities for UK smaller companies remain and if we scratch under the surface, there are some strong stories to tell.
Some of our key holdings, in fact, such as, 4imprint and Jet2, have shown good growth over a turbulent couple of years for markets, with Jet2 trading particularly well through tough consumer times. Ashtead Technology, Volution, Hollywood Bowl are other success stories.
The key is to look at robust earnings growth and earnings resilience. It’s why I find that the ‘recession’ that’s been spoken about over the past 24 months or so has been a bit of a non-event, and more recent data has challenged the narrative.
Interestingly, a key highlight for me would be that while the UK’s GDP growth tends to compare unfavourably with other regions, there are plenty of high-quality UK-based companies still reporting strong results.
And when looking at UK funds more broadly, it is noteworthy that if you look at fund earnings growth, plus dividend income, total returns can take an altogether more interesting shape.
Recession or not, if you don’t have any investments in the UK space and were to enter now, tempting valuations are there for long term stock pickers, but they’re not enough by themselves.
Jet2 is an example of a small UK-listed firm ‘trading particularly well through tough consumer times’
Policy reforms have at least signalled positive intentions, with the proposed UK Isa a clear example, but I wonder whether the extra £5,000 allowance would actually be enough to move the dial.
What we really need to see more action on would be at the regulatory level, to make the UK more competitive. Stamp Duty on UK shares is a case in point. We believe that removing stamp duty on UK shares and UK domiciled investment trusts could be the single biggest boost to UK share ownership in decades.
Private investors seem to agree. Research from interactive investor last month amongst 2,000 of its website visitors found that 82 per cent of those polled thought that ‘stopping the stamp’ on UK shares would encourage more investment in UK listed companies.
The impact of a reduction, or removal, in stamp duty on transaction volumes could be significant. And with stamp duty factored in, investment projects for which the expected rate of return is below the cost of capital in the presence of stamp duty wouldn’t go ahead.
The investment wouldn’t occur even though it would have been worthwhile without the distortionary tax.
Stamp duty has a distorting impact in other ways, too. Take UK domiciled closed-end funds, otherwise known as investment trusts. Retail investors pay a ‘double’ stamp duty tax, once when they buy the investment trust shares, and again when the fund manager places a UK buy within the fund. As a manager who is privileged to manage both closed and open-ended funds, I find this as baffling as it is unfair on investment trust investors.
More broadly, UK smaller companies should be a valid component of a well-constructed portfolio – the opportunities are there. While patience, as ever, is key, if we really want to move the dial, we also need support to keep the UK competitive.
British business is doing its bit to keep the UK growth engine going, but measures to support share ownership and IPOs could add some much-needed oil to the machine.
Abby Glennie is deputy head of smaller companies at Abrdn.
