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Duncan Robertson

Market Outlook

Global SMID-Cap Outlook

Outlook
14 January 2025

By

Portfolio Manager, TT Asia and TT Global-Smid Cap Strategies

Latest Global SMID-Cap economic and market outlook. 


Hero

We have now reached a point where the strength of US equities and the dollar relative to the rest of the world appear extreme. Whilst we understand the reasons for this divergence, we do see potential for a partial reversal of these trends, particularly if there is a convergence in growth expectations between the US and the rest of the world. At this stage that is a contrarian view, but there are good reasons to believe it is possible. The US has benefited over the past few years from far more aggressive fiscal spending than in Europe and the UK, which has seen its cyclically-adjusted deficits widen to a much greater degree. US consumers have also run down their savings far more rapidly than those in Europe and the UK. Much of the positive US growth differential has stemmed from these factors, but clearly they cannot continue indefinitely. Meanwhile, there are several potential sources of positive surprise in Europe, including a removal of the German debt brake, or an end to the war in Ukraine. It is also important to note that Europe suffered far more than the US during the energy crisis following Putin’s invasion. Regardless of whether the war can be brought to an end, energy now seems to be very well supplied, so Europe should benefit disproportionately from ongoing normalisation here. Europe has also suffered more acutely from the higher rate environment as a far greater proportion of its debt is floating rate. Thus, any further cut rates should have a quicker and more significant impact in Europe. Finally, it appears that the Chinese authorities are belatedly realising the seriousness of the problems facing their economy and the additional risks that an adversarial US president poses. Whilst our longstanding concerns around China are unchanged, namely debt, deflation, demographics and geopolitics, the likelihood of further Chinese stimulus would seem to be increasing, which would generate a positive growth delta for many economies outside the US, most notably in Asia. For these reasons, whilst we have marginally reduced the US underweight for risk mitigation purposes, we expect to remain underweight.

From a thematic perspective, we remain very bullish on AI. Hyperscalers such as Google and Microsoft are still increasing their investments in AI, and we are confident that this will continue for several reasons. Firstly, the models are still scaling, and are becoming increasingly useful in the real world as they do so. For example, improvements in models are now allowing companies to create agents to perform tasks that can replace humans – so-called agentic AI. This should drive productivity gains, increasing the value of the models and justifying the hyperscalers’ CapEx. Secondly, there is an element of game theory here. For each of these companies, if they do not invest in AI, their core business could be disrupted. For example, Google’s search business could be particularly vulnerable to AI disruption unless it continues to invest. Crucially, not only do the hyperscalers have the need to invest in AI, they also have the ability. Despite record investment, they remain free cash flow positive, with net cash balance sheets. Over the quarter we added Kaori Heat Treatment, which produces liquid cooling components that are increasingly being used in AI data centres. We see very significant growth from adding new products to existing customers, but also winning new customers. 

Elsewhere, we added to the Digital Consumer theme through the purchase and top up of Rightmove and Scout24, respectively. They are the dominant property portals in the UK and Germany. Both are expanding the services they offer, and provide very high returns on capital. They trade on 20-25x next year’s earnings, a material discount to competitors such as REA on 40x. Another purchase within this theme was CTS Eventim, a specialist in ticketing services and live entertainment. It is the second-largest ticketing company globally and the leader in Europe. Additionally, CTS ranks as the third largest event promoter in the world, behind Live Nation and AEG Presents. Despite the shift towards digital, people continue to seek real-world connections and experiences. Consequently, we believe the live entertainment industry represents a compelling long-term growth opportunity within the broader entertainment sector. CTS holds a leading position in the market, and demonstrates consistently strong execution. It has a net cash position, 20% return on invested capital, and nearly 100% net income conversion rate.

Conversely, we sold Aixtron due to concerns over the EV market, particularly given the potential for Trump to cut EV subsidies in the US. Samsonite was also sold due to disappointing earnings revisions and questions over its long-term growth potential in the face of rising competition. Finally, we took profits in CyberArk and Atkins Realis.

Important Information:

Nothing in this document constitutes or should be treated as investment advice or an offer to buy or sell any security or other investment. TT is authorised and regulated in the United Kingdom by the Financial Conduct Authority (FCA).

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