Brexit-hammered small caps bouncing back

There's been little sign of the negative effects of Brexit that were widely forecast, with a slew of positive economic data (most recently from the services sector), helping to underpin the optimistic mood.

Indeed, says Gervais Williams, managing director of Miton Group and manager of CF Miton UK Multi Cap Income and Diverse Income Trust among others, it's easy to believe the UK has "the best of both worlds" at present.

"We're still in the European Union, but sterling's 10% devaluation has given exports a big competitive boost," he says. Similarly, in the housing market there's been a slowdown in prices while mortgage rates have tended to fall even further.

Williams stresses that investors should not be lulled into a false sense of security at present, as the downside of leaving the EU has yet to manifest itself for the UK.

But he is more concerned about the broader outlook: "Brexit is a lesser event than the bigger picture, which hasn't much changed. The world economy is not growing. There is an argument that says that even in the US, only the consumer is keeping recession at bay. Chinese growth remains very vulnerable."

Against this backdrop of chronically sluggish growth, "the vibrancy of smaller companies is very important", he says, because it's so much easier to grow dynamically from a low starting point. In addition, many small companies occupy a niche position where corporate growth does not hang upon benign macroeconomic conditions.

"We were not at all worried in the aftermath of Brexit because of that vibrancy," he says. "Their share prices were trashed, so we went out and bought lots more."

Williams makes the point that the more consumer-oriented companies - including the likes of retail, challenger banks, travel companies, media companies, housebuilders - are all correlated with the risk of domestic slowdown as Brexit is implemented.

"Most people will seek to reduce that risk over time, so there's likely to be some diversification into less cyclical areas - sectors with internet bias, manufacturing, durables such as insurance," he says.

"We haven't made a lot of changes; cash-generative companies with good potential for dividend growth are still very important for us." He points to London-listed online payment operator Safecharge as one share he has snapped up since Brexit: "The share price was decimated even though the company has $100 million in cash."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.