Market Commentary - UK Small Cap Team, September 2021

Market Commentary - UK Small Cap Team, September 2021

15 October 2021

Posted by Anna Macdonald on 15th October 2021

September marked a shift in tone and mood in the markets, as global shortages and supply chain issues continued and appeared to be worsening in both severity and potential longevity. A ‘just-in-time’ supply model has faltered since the pandemic. This has led to unprecedented swings in raw material prices, energy costs and labour shortages. These are global problems, exacerbated in the UK by the effects of Brexit which has led hundreds of thousands of workers to return to the EU as well as imposing significant new trade frictions.

Sharply rising prices and low inventories are dampening confidence as we head into the ‘golden quarter’ of the run-up to Christmas. It remains the case that consumers and companies have accumulated nearly £200bn of savings in the UK alone, and they remain more likely to start spending this than to sit on it, particularly if they fear rising prices. GDP growth is still anticipated to be mid to high single digit in most advanced economies. However, growth expectations have been trimmed because of supply shortages, and cuts to earnings expectations are exerting substantial downward pressure on stock prices. 

Inflation looks likely to persist for longer and rise higher than central banks originally thought, putting pressure on them to raise rates if they are to stick to long term targets. Will they? Interest rate increases will not unlock supply chains and could simply dent demand, leading to stagflation. A possible scenario – suggested by a paper published by the Federal Reserve last week – is that Central Banks look beyond supply side inflation and broaden their targets to include measures of economic growth, employment, even house price movements. Recent comments by MPC board members in the UK have sounded more hawkish, however.

The IPO market, which was extremely buoyant over the last 12 months, has chilled markedly and this seems unlikely to ease in the short term.


The Fund performed in line with the market, falling 2.5% in the month compared to a benchmark fall of 2.4%.   

The main positive contributors were Accesso Technology, which performed well on strong first half numbers and Dianomi, which also published solid interims, sending shares up 37%. The unloved energy sector sprang back into life and was also a significant contributor as oil and gas prices rose, with Energean, Petrotal, Touchstone, I3 Energy and Jadestone all posting strong gains, albeit these are small positions.

The main detractors were Renalytix and Alphawave.  Renalytix fell on a decision by the Centers for Medicare & Medicaid Services (CMS) not to provide immediate coverage for four years for any new device or diagnostic designated as a breakthrough technology and approved by the FDA. We remain confident in the company’s prospects as the roll-out of Renalytix’s KidneyIntelX continues with healthcare systems and data show that it delivers improved patient outcomes and cost savings. The company already has a lucrative ten-year Government Services Contract which allows it to get paid for testing government employees, with the Veteran’s Administration of immediate interest. Alphawave’s share price fell by 50% after an FT Alphaville article on 29th September.  The article sought to portray the company’s founder and chairman, John Lofton Holt, as having created Alphawave’s extraordinary revenue growth through questionable related party transactions.  We understand that the content of the article probably came from one of two hedge funds that were short and getting burnt by the publication of a strong set of results.  Having examined the potential issues around related party transactions when we bought our holding a few weeks after the company’s IPO, we are satisfied that the insinuations in the article are wrong headed and that the market is now significantly under-estimating the potential of this cash generative business which makes 95% gross margins and saw revenue grow by 140% in its interim results.

Weakness was also seen in textile chemicals specialist HeiQ, following sales downgrades, online trading platform CMC Markets, on reduced activity and client churn, and telecoms services provider Gamma Communications, on in-line results. We increased our holding in Kape Technologies as they issued shares to acquire ExpressVPN, in their attempt to capture more of the fast-growing market for Virtual Private Network (VPN) products. These allow customers to combat censorship, restrictions or unavailability (accessing content and services globally which may not be available locally) and to ensure internet activity privacy through encryption. The deal was significantly earnings enhancing and was taken well by the market.