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Reassessment of political risks could benefit mid and small caps in 2018

Reassessment of political risks could benefit mid and small caps in 2018

Comment from Neil Veitch, manager of the SVM UK Opportunities Fund

“As we enter 2018, we believe investors should start reassessing levels of political risk in the UK relative to other countries. This would prove beneficial to sterling and, in turn, UK mid and small-cap stocks.

“In Germany, either fresh elections or Merkel’s Christian Democratic Union party having to rule as a minority government can’t be ruled out. While some have probably been keen to exaggerate the magnitude of this political crisis, it does make any near-term steps towards further European integration less likely. Italian elections, now only a few months away, are also haunted by Silvio Berlusconi’s cameo as the ghost of Christmas past.

“At a stock-specific level, the outlook for professional information company, Informa, looks bright, especially following a robust trading update. Growth may moderate slightly, but peers who have consistently delivered similar levels are valued significantly higher.

“For British Land, the focus on London office campuses is working. Adding to the potential usage of space at Broadgate, Regent’s Place and Paddington is delivering rents far greater than that of just adding further square footage. Changing the blend of occupiers benefits all and makes the strapline “Places People Prefer” sensible and financially beneficial. NAV growth of 2.5% and dividend growth of 3% is unspectacular, but significantly better than what is discounted in the share price.

Norcros’ acquisition of Merlyn Industries, a designer of high-end shower enclosures, fits the template that Norcros has established over the last few years – making bolt-on acquisitions of complementary products that they can push through their distribution network. Historically, this has proven very successful and enabled the company to consistently grow its revenues, profits, and dividends. Despite this, the shares continue to languish on a rating of 6x, partially explained by the group’s end-markets, but also its large pension scheme. We believe these concerns are overplayed and that the shares will re-rate.

“Elsewhere, Ryanair’s shares rallied in November as the company announced that it would meet full year guidance. This is a very credible result given the well-publicised disruption the company has had to deal with.”

The SVM UK Opportunities fund has a three crown FE rating. In the 12 months to 30 November 2017 it delivered a return of 17.3% compared to 13.4% for the FTSE All-Share and an average return of 15.3% for the IA UK All Companies Sector. Over three years, the fund is up by 43.8% compared to 25.2% for the FTSE All-Share and a sector average of 30.1%.*

* Source: Lipper, B Share Class, GBP, UK net tax with net income reinvested and no initial charges.

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