By continuing to use this site you consent to the use of cookies on your device. Find out more about our cookie policy and the types of cookies we use by clicking here

How Brexit has Impacted Small Business Investors

Brexit has, generally speaking, been good for micro-capped companies in the short term. However, input price inflation can have a negative effect on businesses

External Writer 10 April, 2017 | 9:32AM

Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, Judith MacKenzie, Partner and manager of the Downing Strategic Investment Trust, examines how micro-businesses have been impacted by Brexit and the outlook for slower UK economic growth.

In the UK, Article 50 has been triggered, but as to how long Brexit will actually take? Two years? 10 years? It is anyone’s guess.  We remain aware of the macroeconomic backdrop but we are not constrained by it, nor do we structure portfolios around it in a top down fashion.

Brexit has, generally speaking, been good for micro-capped companies in the short term. The devaluation of sterling made one portfolio company, Red24, a cheap acquisition target, and our exporting companies can be more price competitive, on a like-for-like basis, than they were before. On the flip side, we have seen some input price inflation which can have a negative effect on businesses which cannot pass this through to their customers. We remain vigilant to this and we stress our own forecasts on companies for the impact of inflation.

Slower UK Growth Impacts Micro-caps

Whilst slower UK growth can affect companies across the board, we believe that smaller capped businesses are well placed to weather these headwinds. We know that it is easier for small businesses to grow earnings than it is for large businesses – this is the crux of the academic argument for investing in smaller companies. With this in mind, whatever the economic conditions, smaller companies should always provide the best opportunity for investors for growth. Combined with our diligent process and concentrated portfolios, we believe that we can continue to pick the most favourable businesses in our universe.

Fundamentals

We favour high-quality businesses with strong management teams, healthy free cash flows and demonstrable barriers to entry which help to protect profits. Additionally, we look favourably upon businesses whose value can be covered in part or whole by tangible assets, particularly net cash. These factors tend towards longevity and can provide solid foundations for growth under the correct economic conditions. Notwithstanding the attributes above, our businesses are not immune to the volatility in the markets. Investors should monitor price movements and volumes closely and use this heightened market activity to pick up stock at favourable prices as we intend to.

This is a prime stock pickers market, where a company’s idiosyncrasies are can make all the difference between success and failure. Thorough research and due diligence helps to mitigate risk as well as identify the best possible opportunities for strong, long term returns.  

Disclaimer
The views contained herein are those of the author(s) and not necessarily those of Morningstar. If you are interested in Morningstar featuring your content on our website, please email submissions to UKEditorial@morningstar.com

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

External Writer  .