The week that was …
Economic round-up
Trump threatens more tariffs
US president Donald Trump has warned he will slap a 100% tariff on imports from European countries that implement a digital services tax on US companies. The levy would apparently supersede any trade deals between the US and those countries. The European parliament recently backed an EU-wide digital services tax, although this would require the support of all 27 member states. Read more from the FT here
US inflation points to September rate rise
The US Personal Consumption Expenditures (PCE) index – the Federal Reserve’s preferred inflation measure – increased 4.1% year-on-year in May. Core PCE inflation was meanwhile up 3.4% year-on-year – up 30 basis points on a monthly basis. This suggests an interest rate rise in September is more likely. Read more from Reuters here
US trade deficit swells
The US trade deficit in goods rose to a 14-month high in May as businesses boosted imports – likely in a bid to avoid shortages and higher prices related to the war in the Middle East. Economists cut their growth estimates for the US economy as a result. The US Commerce Department also reported a decline in exports. Read more from Reuters here
UK PMIs reflect service-sector weakness
UK private sector activity contracted for the second month in a row in June, with the S&P Global Flash UK PMI Composite Output Index edging down from 49.7 in May to 49.4. Sustained weakness in the services sector overshadowed a boost to manufacturing output. Overall new business volumes declined at the fastest rate in 14 months. Read more from S&P Global here
US business activity continues uptick in June
US business activity growth improved for a third successive month in June. The S&P Flash US Composite PMI Output Index rose to 52.2 from 51.5 in May – a five-month high. That said, the rate of growth remained weaker than at the start of the year and companies also cut back on their staffing levels amid concerns over the outlook. Read more from S&P Global here
US consumer sentiment revives
US consumer sentiment rebounded from record lows in June, although households remain worried about the high cost of living, according to the University of Michigan’s Surveys of Consumers. The Consumer Sentiment Index increased to a final reading of 49.5 this month – up from 44.8 in May. Read more from Reuters here
Markets round-up
Mixed fortunes on Wall Street
Wall Street had mixed fortunes on Friday, after a wobbly week for the technology sector. Moderna and other healthcare stocks made gains, but AI-related chip stocks tumbled from recent highs. The Nasdaq dropped more than 4% over the week as a whole. Read more from Reuters here
Oil prices drop
The price of Brent crude fell to $72.40 (£54.84) a barrel as oil started to flow from the Gulf. Traders were willing to pay more for oil to be delivered later in the year – a strong sign the market is oversupplied in the short term. Read more from the FT here
Another strong week for US dollar
The US dollar fell on Friday as recent economic data and a drop in oil prices cooled expectations of a rate hike from the Federal Reserve. Even so, the US currency was still up for the week and on pace for its strongest monthly percentage gain since July. Read more from Reuters here
Bitcoin hits 20-month low
Bitcoin hit its lowest level in 20 months, sinking below $60,000. The drop appears to be a response to a deepening sell-off in tech stocks and the growing potential for an interest rate rise in the US. $60,000 has been seen as an important support level for much of the past two years. Read more from the FT here
SpaceX debt sale oversubscribed
Less than two weeks after its record IPO, SpaceX has raised $25bn in a debt sale. The sale was significantly oversubscribed, with the company receiving nearly $90bn of orders. Read more from CNBC here
“We believe we may be in the early stages of an extended cycle of mean reversion in relative valuations for smaller companies and we are excited by that prospect.
Selected equity and bond markets: 19/06/26 to 26/06/26
| Market | 19/06/26 (Close) |
26/06/26 (Close) |
Gain/loss |
|---|---|---|---|
| FTSE All-Share | 5576 | 5643 | +1.2% |
| S&P500 | 7501 | 7354 | -2.0% |
| MSCI World | 4828 | 4754 | -1.5% |
| CNBC Magnificent Seven | 423 | 399 | -5.6% |
| US 10-year treasury (yield) | 4.46% | 4.37% | |
| UK 10-year gilt (yield) | 4.84% | 4.74% |
Investment round-up
Government tax on cash ISA interest
The government is to levy taxes of 22% on cash ISA interest over a certain level as part of its anti-circumvention push. The plans, which have been criticised as “draconian” and counter-productive to its stated aim to create an investment culture, would also prevent transfers from non-cash Isas into cash Isas for under-65s.
Baillie Gifford launches tokenised mutual fund
Baillie Gifford has launched the UK’s first tokenised mutual fund regulated by the Financial Conduct Authority, in partnership with New York-based financial services group BNY. The Baillie Gifford Enhanced Yield fund is described as the “first publicly available fully native UK-regulated tokenised” vehicle.
Active ETF inflows reach record high
Global assets under management in active exchange traded funds (ETFs) and inflows into the sector have both hit record highs, according to research group ETFGI. Data shows active ETFs now hold $2.49tn (£1.89tn), while a record $412bn flowed into the asset type in the 12 months to the end of May.
Chips a ‘quasi commodity’ – Orbis
Ever-rising demand for compute due to AI, coupled with supply issues, will make chips into a “quasi-commodity”, according to Orbis Investment Management portfolio manager Alec Cutler. He said today’s AI infrastructure spend differs from the day of the internet rollout in an important way, explaining: “All the infrastructure that was put in for the internet is still there. All the spending you are seeing going into AI, other than energy generation, is in consumables.”
Aberdeen partners Future Group in sustainable infrastructure push
Aberdeen Investments and Australian-based superannuation and financial services firm Future Group have partnered to invest in global sustainable infrastructure. This includes supporting decarbonisation efforts, expanding social and affordable assets in housing and healthcare and connecting communities with cleaner transport.
Aviva launches three fixed income funds
Aviva is launching a trio of fixed income funds – a global hybrid bond fund, a senior asset-backed securities income fund and a global unconstrained credit fund. The group said it was in response to changing client allocations and significant growth in sub-asset classes.
Liontrust sees continued outflows
Liontrust Asset Management’s annual revenue and profit tumbled over the year, although investors were cheered by an earlier-than-expected completion date for the acquisition of River Global. Assets under management and advice fell 13% over the year to £19.6bn, with net outflows of £4.2bn.
JPMAM expands ETF range
JP Morgan Asset Management has expanded its global equity ETF range with two strategies. The JPM Global Equity Active UCITS ETF targets higher alpha while the JPM Global ex-US Research Enhanced Index Equity Active UCITS ETF brings a research-enhanced approach to global ex-US equities.
… and the week that will be
What will US jobs data signal on rates?
Jobs data set to be published this week should shed light on the US economy’s strength and, potentially, decide the direction of interest rates. This, in turn, could fuel further volatility in a stockmarket already on edge from swings in technology shares. Commentators have suggested the monthly jobs report due on Thursday could increase bets on rate hikes if it indicates a hot economy. Read more from Reuters here
Manufacturing data another test
Due out on Wednesday, meanwhile, the ISM manufacturing purchasing managers’ index is expected to have slipped to 53.7 in June from 54.0 in May. Investors, however, are likely to focus on the prices paid index, which will show whether inflationary pressures in the manufacturing sector remain elevated. If incoming data suggests the Federal Reserve is falling behind the inflation curve, the dollar could strengthen further. Read more from CMC Markets here
The week in numbers
Eurozone inflation: Consensus expectations for the flash reading of Eurozone inflation in June is that year-on-year Consumer Price Index (CPI) inflation will hold at 3.2%, while rising to 0.3% from 0.1% month-on-month. Core CPI inflation is expected to hold at 2.6% year-on-year.
US jobs data: Consensus forecasts have US non-farm payrolls rising by 90,000 in June, compared with 172,000 last month, while the unemployment rate is forecast to rise to 4.5% from 4.3%. Average hourly earnings are expected to rise by 0.2% month-on-month, versus 0.3% in May, and 3.4% year-on-year – in line with May. The ADP employment report is meanwhile expected to show 85,000 jobs were created in June, compared with 122,000 in May.
US consumer confidence: Consensus expectations are that the US consumer confidence index will rise to 95 in June – up from 93.1 in May.
US business sentiment: Consensus forecasts have the ISM purchasing managers index (PMI) of manufacturing activity slowing to 53.6 in June, from 54 the month before.
China business sentiment: Consensus expectations are that China’s manufacturing PMI will edge up to 50.3 in June, from 50 in May, while the non-manufacturing equivalent rises to 50.5 from 50.1.
In focus: Small beginnings
The ‘smallcap effect’ is well-established in global stockmarkets and its rationale is sound. Investors are usually gaining a company earlier in its lifecycle, with a better runway for growth. In addition, these businesses are less well-researched, more likely to be acquired and more agile in difficult times. Given their long-term outperformance, picking such stocks up when they are cheap and out-of-favour has generally been a good idea.
There is a lot to suggest now is one of those moments. Smaller companies have had a difficult run, with the MSCI World Small Cap index trailing the MSCI ACWI by an average of some four percentage points a year for the past five years. A nascent recovery for global smallcaps at the start of the year, fuelled by stronger earnings growth and the prospect of lower interest rates, was derailed by the US/Israeli attacks on Iran and the subsequent impact on inflation.
Richard Tennant, manager on the Goodhart Partners Global Smaller Companies fund, says there are always cycles in global smallcaps and they tend to mean-revert. “It is tough to know when to make that move,” he concedes but adds that, while these periods can last for long periods of time, global smallcaps are still on a near all-time discount to their larger counterparts.
At the same time, it would seem an opportune moment to tap into the diversification potential smallcaps can provide. Global stockmarkets are showing unprecedented concentration in a handful of AI names and the problem is only likely to worsen as a number of giants – SpaceX, Anthropic and ChatGPT – are absorbed into the major indices. Most global smallcaps funds will have little or no overlap with, say, the MSCI World.
That said, capturing the upswing in global smaller companies is not straightforward – this is hardly a market ideally-suited to index investment. As Tennant says, most index providers will take the bottom 5% or so of each market, by market capitalisation, and bolt them together.
The result is often a disjointed selection of companies – a US smallcap might have a market cap of $25bn, for example, but that number may drop to $6bn in the UK or even $3bn in the Nordics. Like other major indices, the space tends to be dominated by the US, with more than 60% of the market capitalisation there. There is also the problem, as Tennant warns, that global smallcaps can be “a graveyard where companies go to die”.
“If it is a structurally declining business, it can get worse and worse,” he elaborates. “Our research suggests 38% of global smallcaps detract over a five-year period. That is a lot higher than for mid and largecap. Just steering clear of those ‘detractors’ is a 900 basis-points headwind per annum over time.”
One of the inefficiencies of smaller companies investing is the marginal investor often fits into two buckets – tourists and speculators.”
Equally, the strongest gains tend to come from just a handful of stocks. The idea of the smallcap premium may appear to suggest there is something universal about smaller companies’ growth but this is by no means the case. A few companies do brilliantly well, which accounts for most of the smallcap gains seen, while there is a long tail that just muddles along – or worse. Squeezing the most out of global smaller companies requires identifying these winners.
Will Lough, global smallcap portfolio manager at Otus Capital Management, says investors should also be aware of some of the idiosyncrasies of the asset class. “One of the inefficiencies of smaller companies investing is the marginal investor often fits into two buckets – tourists and speculators,” he explains. “Tourists want to invest in smallcaps because they gain higher exposure to economic growth, or for other top-down reasons, But if you invest in the broader benchmark, it is – quite frankly – full of businesses you would want to avoid.”
The “speculators” meanwhile come in for “super red-hot growth”, Lough says. “That is also not a great way to make money repeatedly in small caps,” he adds. “The growth factor is less persistent in smallcaps than in largecaps. Very fast growth in smallcaps may not last.”
Any global smallcap process needs to find a way to isolate those winners. For his part, Goodhart looks for companies undergoing significant change – a five-year-plus structural shift – and these could be serial acquirers, roll-outs or spin-offs. Companies with a “flywheel” are a priority, he says, defining the idea as “something long-term and self-perpetuating that helps ensure, as a company gets bigger, it gets better”.
According to Goodhart, history suggests some 2.5% of companies should grow 10x. “You can increase that meaningfully if you layer in certain financial characteristics – for example, margin expansion, cash generation, return on investment and then an attractive valuation,” he argues. “That increases our odds of finding those 10x growth companies from 2.5% to 44%. We end up fishing in a fertile pond of 500 to 600 companies that have the ability to do that.”
Otus has a similar ‘funnel’ system – and Lough says the firm’s process relies on having a relatively small number of companies they know very well. “These are companies with ‘moats’,” he continues. “This might be industrials, with a strong niche and a high recurring after-market, or medical technology businesses with a specific niche, or perhaps retailers with a strong proposition around everyday low prices.”
This is a timely reminder there is a whole world out there that does not just revolve around a single theme.”
Another factor for investors to consider is the relative performance of quality versus value. Lough maintains a balance of both in the portfolio, adding: “Quality headwinds have been pretty severe, starting in the middle of last year. We find that quality helps keep our value instincts at bay and also to pick companies that can do a lot of the hard work for us.”
He says the Otus team are now identifying a lot of higher-quality companies at good valuations, delivering solid growth and with an attractive cashflow yield. Fantasy gamer stock Games Workshop is typical of the type of company that suits their process and they are finding a lot of opportunities in the UK at the moment – and also in Japan.
“One of our three recurring-pattern recognitions of quality is this concept of hidden quality,” says Lough. “Japan is full of fantastic global leaders in their specific niches but either the balance sheet has too much cash, masking overall returns, or there is a subscale small business in the tail of the company.”
Active global smallcap managers are clearly enthusiastic about their asset class at this point in the cycle. “We are really excited by the number of great high-quality companies we can buy at fantastic valuations,” is how Lough sums up the situation. For his part, Nish Patel, manager of the Global Smaller Companies Trust says: “The adverse market environment created the chance to buy into excellent businesses that were significantly undervalued. We have been taking advantage of that opportunity.”
“It is encouraging to see smaller company shares begin to outperform their larger company counterparts after a prolonged period of underperformance. We believe we may be in the early stages of an extended cycle of mean reversion in relative valuations for smaller companies and we are excited by that prospect.”
For Goodhart Partners’ Tennant, meanwhile, this is a timely reminder “there is a whole world out there that does not just revolve around a single theme”. It could be the moment for the right small companies to offer not just some defence against the volatility of the AI theme but also an alternative source of growth.
In focus: Tech wobbles
The technology sector has had a tricky week. Even a strong earnings statement from Micron last Wednesday could not revive the performance of the Nasdaq index, which has now seen its longest losing streak since February. Stockmarket newbie SpaceX may have been the poster-child for the sell-off but Apple and Microsoft also struggled.
There appeared to be no immediate catalyst for the sell-off – although the market may have been spooked by surging memory costs. Equally, Apple said it would be passing costs onto consumers, which may have created fears of demand-destruction for some devices. Another potential source of nervousness could have been the news OpenAI is considering delaying its IPO.
Allianz Global Investors CIO Ludovic Subran went on to warn last week’s SpaceX debt issuance was a signal markets were in bubble territory. Raising debt so soon after a blockbuster equity issuance was, he argued, a “good example” of markets shifting from “a healthy boom, a stretched boom, into bubble territory”.
There may also have been technical factors at work. “Investors have seen great returns this quarter despite intense global risks, so now many institutional investment managers must rebalance their asset weightings back to target – by selling the assets that have done well,” observes Lothar Mentel, chief investment officer at Tatton Asset Management. “Rebalancing selling pressures are temporary but the extent of this sell-off suggests that markets might be less fun in the second half of the year.”
The reality may be that, when prices are this high, the market can be spooked by relatively trivial factors. There remains little question over the growth of AI demand – as Mentel points out, Micron’s quarterly profits were 15 times higher than the same period last year – but this is both a reason for optimism and caution. “Micron boasted about escaping its historic classification as a cyclical stock, thanks to billions in long-term contracts” he says. “The more people tell you it will go up forever, the more you wonder if we are at the peak.”
Clearly, there are some concerns around AI adoption – for example, there are reports that companies are starting to balk at the costs involved, which may slow the process. Equally, AI stocks have been rallying since late 2022, which in itself should be prompt some nervousness. As with all technology adoption, there are likely to be stormy periods. No-one quite knows where the AI trend is going – and any sign that it could be anything other than an unalloyed success has the potential to cause waves.
