The Global Smaller Companies Trust Market Snapshot – December 2024

In November, smaller companies rose in most geographies in sterling terms, with the exception of Europe and the emerging markets. Economic data was worse than expected in most regions; however, China saw some improvement. Cyclical sectors were in favour, with consumer discretionary, financials and industrials leading. In contrast, defensive sectors such as
healthcare, materials and consumer staples lagged. The month was dominated by the US election, in which Donald Trump secured a decisive victory and the Republican Party achieved a ‘clean sweep’ of both branches of Congress. As a result, the US could benefit from deregulation and the extension of previously enacted tax cuts. On the other hand, tariffs may impact trading partners and inflation could see a resurgence. Interest rates were cut again in the US and the UK. Bond yields were volatile and were influenced by the continuously changing outlook for economic growth, inflation and fiscal budget deficits. Yields rose in the first two weeks of November and then fell towards the end of the month. Equity market valuations expanded significantly, particularly in the US, and corporate bond credit spreads tightened to very narrow levels.

The Company’s Net Asset Value (NAV) rose 3.4% in November. The discount widened a little during the period. The movement in the Company’s NAV and share price underperformed the Benchmark.

In North America, our portfolio struggled to keep up with a rapidly rising market and lagged its Benchmark. The Ensign Group (an operator of healthcare facilities) and Molina Healthcare (a managed care organisation) fell with the sector because of concerns over potential reductions in federal healthcare program funding levels by the new administration. Precious metals streaming company Wheaton Precious Metals fell with the gold price. On the positive side, diversified financial services company Jefferies Financial Group and regional bank Webster Financial were both seen as possible beneficiaries of deregulation in the sector. Security software business Cognyte Software announced a share repurchase program and the shares responded favourably to this.

The UK portfolio underperformed its Benchmark in November. John Wood Group, a provider of engineering and project management services, fell after the company initiated an independent review of its contracts. A challenging retail backdrop continued to impact sales at Pets at Home, particularly in the company’s more discretionary product lines. Structural steel business Severfield saw delays in large projects and uncovered specification issues with some of its products. We received another takeover bid in the UK, with an approach for restaurant chain Loungers by private equity at a 30% premium. FD Technologies, a technology provider to the financial services industry, reported good results and disposed of its consulting business. Provider of online auction platforms Auction Technology Group announced encouraging results, with previous investments now appearing to bear fruit.

The European portfolio was slightly behind its Benchmark during the month. Profit forecasts rose for Accelleron Industries, a manufacturer of turbochargers units. Results were better than feared for Italian industrial company Interpump, and investors started to look forward to a recovery in earnings after a period of inventory reduction. Similarly, despite difficult trading conditions, particularly in the fashion industry, software developer Lectra remained resilient and delivered a solid set of results. On the negative side, ticketing and events business CTS Eventim saw higher costs that reduced the company’s profitability. Concerns over tougher price negotiations with customers and higher wages hindered commercial services company Elis. A slowdown in growth led to lower earnings forecasts for speciality chemicals company Symrise.

Returns in Japan were ahead of the MSCI Japan Small Cap Index in November. Wire manufacturer SWCC Showa Holdings raised its earnings guidance because of strong demand and improved labour availability. Building products specialist Sanwa Holdings saw good performance from its Americas division, leading management to raise the company’s profit forecast for the year. Regional bank Nishi-Nippon lifted its dividend and announced a share repurchase program. Pharmaceuticals distributor Toho Holdings suffered from concerns over an adverse shift in sales towards lower margin products. Technology hardware business Amano and radiation equipment manufacturer Rigaku were both the subject of profit-taking.

In totality, the Rest of World fund holdings underperformed during the month. The Schroders Global Emerging Markets Smaller Companies and the Pinebridge Asia ex Japan small cap funds outperformed. The Scottish Oriental Smaller Companies and the Utilico Emerging Markets investment trusts both underperformed and were particularly affected by a widening in their discounts.