Page 4 - ISQ UK_October 2017

INVESTMENT STRATEGY QUARTERLY

Letter from the Chief Investment Officer (cont.)

Sector Exposure Will Steer Small Cap Focusing On US Equities’
in the Right Direction Consistent Stride

Luge competitors are the fastest of all Winter Games athletes, and In short track speed skating, victory margins are as thin as the
the fact the sleds do not have brakes puts it among the riskiest of blade and one small slip can lead to defeat. With the track meas-
sports. The same could be said of small-cap equities, as they have uring just over 100 meters, any athlete could win. Similarly, it is
faster earnings growth but a higher beta than large-cap equities. hard to pick a region as a short-term equity market winner given
But unlike lugers who fly down the track on their backs, small-cap that varying supply chain bottlenecks, COVID surges, and differing
returns did not fall flat on their backs last year. However, they did policy responses are causing false starts. However, long-distance
not travel on the optimal line down the course. Given our eco- speed skaters, just like long-term investors, have more time and
nomic growth expectations for this year, especially the uptick in space to excel. Profitability ratios give the US the inside track versus
services spending, small-cap equities should offer investors an other developed markets with the UK close behind, but the Asian
edge. The asset class’s shell of a sled is composed of some of our emerging markets are gaining on us. Between attractive valuations,
preferred cyclical areas of the economy (e.g., Industrials, Finan- exposure to high-growth tech industries, and scope for additional
cials, Energy). stimulus, investors should think globally as the International
Olympic Committee does.
There are No ‘Bindings’ on Technological
Re-Invention and Adoption Oil Prices Dynamics Will Find
Their Balance
Many think of snowboarding as a quintessential winter sport, but it
is still relatively new to the Olympics. Once, skiers were sceptical of The energy market’s performance in the recovery’s routine has
its future, but its popularity has surged, and now there are courses been anything but smooth, with COVID, inventory releases, and
around the globe. The pace of technological adoption has been natural disasters causing oil prices to twist, turn, spin, and lift.
similarly eager, with events such as the pandemic deepening our However, supply and demand dynamics should find their bal-
dependence on innovation. Just as the difficulty of the gravity-de- ance and help oil prices avoid a fall. In past Olympics, Russian
fying snowboarding stunts has increased, technology keeps figure skating judges sometimes scored compatriot athletes too
reinventing itself, making revolutionary contributions to produc- high and competitors too low. In the oil market, we still have a
tivity. Like the demonstration sports in the Olympics, once fans try Russian judge and its OPEC fellow judges who are likely to con-
new technology, it becomes a permanent part of a business’s per- tinue to prop up the price. Therefore, we expect oil prices to
formance. Just watch the development of the Metaverse, which is remain around the figure eight(y) range. Prices at this level
a young gun growth catalyst offering an online world with virtual should no longer lead to deductions in the growing renewable
reality, 3D holographic avatars, video, and other means of commu- energy space, and should instead, encourage the development
nications. Rookies like Metaverse are joining veteran catalysts such of these markets.
as cloud computing and 5G, pushing business plans for future tech
spending to record levels. There’s no limit to the stunts the sector
can do, and its earnings power should continue to justify the seem-
ingly lofty valuations.

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