By Scott McKenzie
June was another difficult month for investors globally with both the S&P and the NASDAQ indices falling by 7%. The UK was not immune to the broader trends, with the Numis Large Cap index falling by 5.8%. UK small and midcap stocks continued to lose ground, and we saw a decline in the Numis Smaller Companies & AIM index of 9.4%, taking the falls in the first half of 2022 to over 20%.
The ongoing derating of equities in response to rising interest rates and stubbornly high inflation remains a dominant theme. This contagion has now spread across many other asset classes, with most commodity markets also reversing their previously strong upward trends. The highest risk assets in sectors such as cryptocurrency and early- stage tech companies continued their savage declines. Many such businesses are now announcing major downsizing and cost cutting programmes as reality starts to bite.
We are now in an interest rate tightening mode in both the US and Europe, and it is possible that short rates could reach 4% in the US and 3% in the UK by the end of 2022. Inflationary pressures look set to remain regardless of central bank actions. The dollar goes from strength to strength and has recently reached a twenty- year high. Sterling and the euro appear friendless, with the economic ramifications of the ongoing conflict in Ukraine now set to be profound, in terms of rising commodity prices and the prospect of a severe shortage of natural gas in Europe going into winter. Linked to these concerns is the increasing inevitability of recession, with the Bank of England now seeing this as a central case. Even Federal Reserve chair Jay Powell has now acknowledged that a US recession is “certainly a possibility”. We are now in the next phase of market adjustment – falling corporate profits. All of this suggests a cautious ongoing approach to investing, with the likelihood of earnings downgrades to come.
However, there is a good chance that the current bear market is well advanced already and a number of recent sentiment indicators including the BofA investor survey suggest to us that extreme pessimism is now a deeply embedded and consensual view amongst global investors. The UK market remains out of favour with investors , with a heady cocktail in the UK of Brexit, government instability and weak sterling serving to undermine confidence. As a result UK assets remain modestly priced in an international context which suggests to us that the current boom in M&A involving UK listed companies looks set to continue.
There is a lack of market leadership at present, with only a narrow group of defensive businesses or takeover targets showing positive returns. Both value and growth strategies appear to be struggling at the same time, with companies who disappoint on earnings being savagely treated by markets. [SMCO / IHT ending] Having seen a broadly based market adjustment in 2022 we remain alert to opportunities which allow us to increase our holdings in high quality companies with strong balance sheets at attractive valuations.
TB Amati Smaller Companes Fund
The TB Amati Smaller Companies Fund fell by 9.4% over the month, which was exactly in line with the benchmark return.
In a difficult month for markets positive contributions were hard to come by. Our best performers during June were concentrated in two key themes – takeover activity and recovery in some oversold technology stocks. Three of our holdings were involved in takeover activity. The highlight was EMIS, which rose 42% in response to an agreed takeover bid. This is a business which had only recently been added to the Fund so it was pleasing to see such strong returns materialise quickly. In a similar vein there has been an initial approach for Euromoney, where the shares rose 25%. This was a business where we had recently began building a position and therefore it was a more modest holding for the Fund. The final M&A announcement came from Caretech, where we got confirmation of the management buyout offer we had hoped for. Several of our technology holdings saw recovery from previously oversold positions, including Craneware and Spirent.
Offsetting these positives were a number of material fallers, led by weakness in consumer spending plays. Halfords fell 38% in response to a profit warning for the year ahead and Inspecs fell by 23% despite solid results finally being reported. Technology remains a mixed bag and we saw meaningful declines in GBGroup and Accesso, which were affected by the ongoing weakness in NASDAQ rather than any company specific issues. There was profit taking in the energy sector as oil prices drifted back towards $100, leading to falls in i3 Energy and Jadestone.
There were no new holdings added in June. Instead we continued to add to existing holdings such as FRP Advisory, Watkin Jones, CLS and Gamma. The remaining holding in Dunelm was sold and we took some profit in Atalaya Mining. Liquidity remains healthy with cash at 5%.
Amati AIM VCT
In what remains a testing market for small, early- stage companies the Amati AIM VCT fell by 5.6% in June, which was well ahead of the 9.8% fall seen in the Numis Alternative Markets benchmark.
In a difficult month for markets positive contributions were hard to come by. Our best contributions during June came from recovery in some oversold technology stocks. Most notable were Craneware (+34%) which rose sharply from a very low valuation point and Frontier Developments (+11%) . The latter company released a more reassuring outlook statement after a period of relative disappointment over the past year or so.
Several of our companies saw price falls as growth stocks continued to reprice downwards in response to the sharp declines in NASDAQ and elsewhere with GBGroup and Learning Technologies both continuing to derate despite posting solid results. Healthcare holdings fell as they were caught in the crossfire of the market selloffs and a general reduction in risk appetite. In the month, Angle gave back its May performance which had been driven by news of FDA approval. Polarean continued its downward trajectory as we await further regulatory news in September.
We made no new qualifying investments during the month, but we have a number of potential transactions in our pipeline.
Having seen a broadly based market adjustment in 2022 we expect that when market sentiment recovers enough to support further capital raising on AIM for VCT qualifying companies, we should find an attractive set of investment opportunities at significantly more modest valuations than were available previously.