UK Edition
March 2009 was the best stock market buying opportunity of recent decades. Since then, equity indices have soared.
The FTSE All-Share index, for example, has risen by 127pc, with its price level having never returned to the depths experienced during the global financial crisis.
Of course, most equity investors missed out on that once-in-a-generation buying opportunity.
Seemingly insatiable levels of fear surrounding the prospects for the world economy meant that few investors had the capacity to recognise that a long-term recovery was ultimately ahead.
Although investor fear is less pronounced today than it was in March 2009, market sentiment is nevertheless overwhelmingly downbeat.
In Questor’s view, the current economic downturn should not concern equity investors with a long-term outlook.
The stock market’s track record shows that it has produced exceptional capital returns following far bigger crises than those currently faced by the world economy.
As a result, with valuations across UK equities being at rock-bottom levels in some cases, now is the time to capitalise on them ahead of a recovery.
Since smaller companies are inherently riskier than their larger peers due primarily to their weaker financial positions and narrower economic moats, investor sentiment towards them is particularly despondent at the moment.
The FTSE AIM All-Share index, for instance, is down by 36pc since the start of last year as investors have pivoted to larger, less volatile stocks.
Weak market sentiment means that the JPMorgan UK Smaller Companies investment trust currently trades at a whopping 13pc discount to net asset value.
This is despite it having a strong track record of performance, with its shares having produced an annualised return of 10.1pc over the past decade.
This is 3.2 percentage points greater than the annual return of the Numis Smaller Companies plus AIM (excluding Investment Companies) index, which is its benchmark, and suggests the trust offers excellent value.
Major holdings include well-known names such as Jet2 and Watches of Switzerland.
Their cyclical nature typifies the focus of the trust, with consumer discretionary stocks accounting for more than a quarter of its net assets.
This represents a near-six percentage point overweight position relative to the benchmark and means that the trust is well placed to capitalise on an improving outlook for UK consumers.
Indeed, consumer confidence recently reached its highest level since February last year after a sharp rise over the past eight months.
With the Bank of England now forecasting that inflation will decline to 3.4pc in the second quarter of next year, while interest rate rises are likely to abate before then, the prospects for consumer-focused stocks are set to improve.
The British economy’s outlook has also recently been upgraded, with the IMF now expecting growth of 0.4pc this year and 1pc next year, followed by an expansion of 2pc in both 2025 and 2026.
With a gearing ratio of 9pc, the trust is primed to benefit from an improving economic outlook that catalyses the operating environments of its British-focused holdings.
Their rising profitability could mean that the trust offers a degree of income appeal, since it is likely to prompt higher shareholder payouts.
Although the company currently yields a rather meagre 2.6pc, dividends per share have increased at an annualised rate of 6.3pc over the past four years and their growth is likely to beat inflation over the long run.
Just as in March 2009, it is currently unclear when the stock market’s performance will improve.
In Questor’s view, however, equity investors tend to look many months ahead when deciding how they feel about stocks.
Since challenges such as high inflation, rising interest rates and weak economic growth are unlikely to last for a significant period, now could be an excellent buying opportunity.
With the JPMorgan UK Smaller Companies investment trust trading at a huge discount to net asset value, offering a stunning track record of performance and being acutely positioned for an improving consumer outlook, it offers a favourable risk/reward opportunity that may only become obvious to the investment masses many years down the line.
Questor says: buy
Ticker: JMI
Share price at close: 268p
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