Ollie Smith: Our thematic look on investment outlooks for 2022 continues today. Here to discuss what might be next for multi-cap income investing is Gervais Williams, Manager of the Premier Miton UK Multi-Cap Income and UK Smaller Companies funds.
Gervais, thanks so much for joining me today. What do you think will be the big challenges for multi-cap investors like you next year?
Gervais Williams: I think the kind of usual tailwinds we've got used to over the last sort of 10 and 20 years in the stock market, which are basically plentiful earnings growth related to global growth, along with valuations which have tended to improve as bond yields have come to ultra-low levels. Effectively, these tailwinds are looking as though they're running out of steam to some degree. We would particularly highlight that the Chinese economy, which has been the cornerstone of global growth over recent years, looks to have hit not just a slowdown, but something of a structural impediment. We think it will be quite slow going forward and therefore global growth will be quite disappointing.
Alongside that, we also think the valuations probably can't go much higher. Bond yields could go negative, but there's not much left there. And most particularly, actually, if anything, we think there might be some margin pressure. We think the wage inflation will be a significant feature, not just this year but into the next few years. And so, if anything, we could see a lot of companies with limited turnover growth, some margin pressure, and that could be quite a challenging environment.
OS: Okay, so which are the companies in the portfolios that you run are particularly well-positioned for 2022? I know you would want all of them to be. But are there any standout companies that you think really stand to benefit next year?
GW: Yeah, we tend to have about 140 holding. So, each individual holding is quite small. What we've been looking for in terms of selecting companies isn't just companies which are able to grow hopefully when the world is not growing, but most particularly, companies which are able to sustain margin and that is, in our view, related to not just the quality of the business, but ultimately about the ability to deliver outstanding, not good, outstanding customer service. So, when we meet companies, we've been asking them specifically how close the board is to actually what happens on the day-to-day basis. And there's an awful lot of boards which are relatively isolated. So, you can think of some of those. They make what they consider to be marvelous decisions, but actually make it harder for the guys at the front line. But actually, we look for those businesses where they are doing staff surveys, where they are getting regular updates about what's going on, and that's very motivating for staff. It helps with staff recruitment. It helps with staff retention. It helps particularly in terms of delivering outstanding customer service. We've got what we consider to be a portfolio of stocks which are delivering outstanding customer service going forward.
OS: It sounds as though there's a lot of welfare at the forefront of the fund's "mind", so to speak. Just finally, let's just go into a bit of depth about the UK. I mean, the U.K.'s economic recovery is looking decidedly uncertain. Could you just give us your thoughts on the economic backdrop in which those companies will be performing?
GW: Yes, I mean, the pattern of the market has been whilst stock markets have been producing such good returns is for investors to get excited by companies which rise faster than the stock market on average these are called high beta stocks. They are companies, which tend to be more volatile. They're more volatile on the way up there; they are more volatile on the way down, and that's really why the US stock market, which is just dominated by many of these highly volatile stocks, has outperformed. It's been a sensational period for the US stock market and particularly the NASDAQ Composite.
The UK, by contrast, tends to have stocks that are slower moving. They have more cash. Often, they pay dividends, but they tend to be less volatile. When the market halves, because they've got an income, their share prices tend to be a slow moving. And so, from that point of view, we think actually it could be a wholesale move by investors away from being focused entirely on these high beta stocks to lower beta stocks. And we think the UK actually will be one of the best markets in the world in terms of delivering returns which are related to slower moving stocks. And as that pattern change comes through, we think the UK will continue to outperform the US stocks and other, so the global stock markets, just as it used to do back in the 60s and the 70s. So, at times of uncertainty, the UK has tended to outperform. We think that'd be resumed and most particularly I think that will catch people unawares. And so, there will be kind of performance catch-up as well as a long-term trend. So, we're pretty upbeat about the potential for the UK to surprise on the upside.
OS: I can see an Aesop's fable there about slow and steady winning the race. Thank you so much, Gervais. And for more on 2022 outlooks and more, check out Morningstar.co.uk. Until next time, I've been Ollie Smith.
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