BlackRock Smaller Companies Trust PLC Regulatory News (BRSC)

The information contained in this release was correct as at 30 June 2023. Information on the Company’s up to date net asset values can be found on the London Stock Exchange Website at

https://www.londonstockexchange.com/exchange/news/market-news/market-news-home.html.

BLACKROCK SMALLER COMPANIES TRUST PLC (LEI:549300MS535KC2WH4082) 

All information is at 30 June 2023 and unaudited.Performance at month end is calculated on a Total Return basis based on NAV per share with debt at fair value 

Sources: BlackRock and Datastream

At month end

Commenting on the markets, Roland Arnold, representing the Investment Manager noted:During June the Company’s NAV per share fell by -1.0% to 1,463.69p on a total return basis, while our benchmark index also fell by -1.0%. For comparison the large cap FTSE 100 Index rose by 1.4%.

Equity markets globally were mostly positive during June, with UK small & mid-caps as a standout exception. Early signs that inflation may be moderating began to emerge and the Fed (Federal Reserve) elected to pause rate hikes in June, albeit reiterating the need for further policy tightening in the fight against inflation. In Europe, data showed that the region entered a technical recession in the first quarter of the year. The European Central Bank raised interest rates by 25bps and indicated further tightening ahead as the economy stuttered. In the UK, inflation remained elevated and wage growth came in hotter than expectations, which led the Bank of England to hike the base rate by 50bps to 5%, the 13th consecutive hike since December 2021. With the growing concerns around the outlook for the UK economy and persistent inflation as a result of tight labour markets, small and mid-caps continued to underperform during the month.

The largest positive contributor during the month was Alfa Financial Software which rose on the back of an announced bid, which has subsequently been withdrawn, from private equity business EQT. Baltic Classified performed well after the company reported strong growth across all four of its business lines (Autos, Real Estate, Jobs & Services and Generalist Businesses). Revenues across the group grew by 19% to record levels, and management provided a positive ongoing outlook. Shares in Kitwave, the food wholesale business, continued to rise during June after their positive trading update in May. The business is seeing a strong recovery in its end markets, despite the challenging macroeconomic environment and inflationary pressures. As a result, and with trading typically accelerating into the second half of the year, management now expect full year results will be ahead of market expectations.

Watches of Switzerland was the biggest detractor amongst our holdings, as the shares continued to fall, caught up in the general drawdown in UK midcap shares following June's inflation data. As noted last month, the company recently reported strong full-year results, however the market was clearly spooked by the small cost-related downgrade. Despite the markets concerns, demand remains robust, the waitlist continues to grow, and the industry backdrop remains favourable with demand for luxury watches continuing to outweigh supply. Other notable detractors included Carnival and Aston Martin, two shares which we do not own and that entered our benchmark in the annual index rebalance at the beginning of the year. Shares in both have rallied through the year, with large spikes during June, however we have continued to avoid as they fail to meet our quality growth investment criteria.

2023 has seen a continuation of the themes of uncertainty, Russia/Ukraine war, China, supply chains and inflation. However, we are closer to the end of monetary tightening and we think inflation is peaking, albeit this is happening slower than we would have expected. As the year-on-year impact on inflation starts to roll over, we could see the environment turn to disinflation quite quickly. Generally speaking, financial conditions are not too stretched; corporates and consumers are reasonably well capitalised, and banks have plenty of capital. As such the path of employment will dictate the consumer outlook but we continue to expect the trough to be shallower than in previous recessions.

Industrial activity is likely to decline as excess inventory works through the system, but given major markets such as automotive and aerospace were already seeing choked demand through supply chain issues, again we expect a shallower trough. Housebuilding and RMI (Renovation, Maintenance, Investment) had a tough first half of year, but we still believe the outlook isn’t as bad as it was in September. Valuations have corrected quickly and looking back it appears all consumer orientated stocks overshot to the downside during the chaotic period around the Truss budget.

Whilst there is much that can be discussed with regards to the economic outlook, one thing is irrefutable; the valuation of UK small and mid-sized companies is more attractive than it has been for some time, and if that valuation is not recognized by the stock market, it will be recognized by others. As stated in recent updates, we expected to see M&A (Mergers & Acquisitions) picking up through the course of the year and this certainly spiked in recent months, with approaches for several companies in the UK as Private Equity have decided to start deploying their substantial cash piles.

We are not out of the woods yet, but the recent round of trading updates from our investments have generally been in line or better than expectations. However, with oil and gas prices lower year-on-year, China re-opening, US$ weakening, shipping / logistics / factory gate prices dropping, much of the inflation pressure of last year could become deflationary during the course of this year, and we have tentatively started to utilise more of our gearing facilities.

Against this difficult backdrop, we remind ourselves that many equity markets (Europe, UK) are structurally under owned and could benefit as sentiment turns and investors begin to reduce these underweights. We remain focused on bottom-up company specific analysis to identify high quality, nimble businesses, operated by entrepreneurial management teams, with strong market positions and resilient cash-flows. These are the types of businesses that we believe will be best placed to manage and thrive in the current environment. Historically these periods have been followed by strong returns for the strategy and presented excellent investment opportunities.

We thank shareholders for your ongoing support.

1Source: BlackRock as at 30 June 2023

25 July 2023

ENDS 

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