An apparent bottoming-out among UK small-cap stocks could signal a positive outlook for narrower dis...
An apparent bottoming-out among UK small-cap stocks could signal a positive outlook for narrower discounts in the investment trust sector.
Derek Larcombe, manager of the Quilter Global Growth and Quilter Global Income funds of investment trusts, said recent moves in the two sectors appear to echo market shifts last seen in late 1998, just prior to a strong rally in equity markets.
'In autumn 1998, FTSE small caps had a sharp decline as the market capitulated, which was quickly followed by a rise of around 100% over an 18-month period. At the same time, discounts on investment trusts excluding 3i also bottomed out,' he said. 'If you put the two charts of top of each other, they are very similar.' Larcombe noticed the pattern appeared to be repeating in late December, when UK small caps fell sharply then began to climb in tandem with a capitulation among investment trust investors, which has since been followed by a narrowing of discounts.
'The last time that happened, we had a massive market boom, but it started with small caps because they were seen as the most unattractive area before that,' he said.
Larcombe, who specialises in seeking out undervalued investment trust stocks, said discounts of 30% and more seen in recent weeks, now reduced to below 20%, strongly suggest the worst is over for investment trusts.
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