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The Henderson Smaller Companies Investment Trust plc

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Three reasons to be positive on UK small cap stocks following the 2024 Budget

In the 2024 budget, the government proactively addressed the UK equity market in several key areas…

Budgets may come and Budgets may go, but the 2024 edition brought some significant changes for UK investors and businesses. As ever, it will take time for the impact to feed through.

Nonetheless, we believe three key announcements paint a particularly positive picture for UK smaller companies. And, while this is one of the last Conservative budgets we expect to hear for some time, we would be surprised if Labour reversed any of the measures discussed here.

1. A brand new (British) ISA

The announcement of a British ISA will allow UK savers to invest an additional £5k of annual tax-free savings in UK listed assets. This is welcome news for the UK small and mid-cap market. The smaller companies segment has been plagued by outflows over the last few years. As investors have sold out of smaller companies more broadly, their valuations have fallen, due in part to them being harder to trade. The British ISA attempts to encourage increased investment into UK-listed assets, which includes these companies.

2. Mandating UK pension fund asset disclosure

The government will work with the FCA to demand UK defined contribution (DC) and local government pension funds disclose their holdings in UK equities. The government will review this data and if it shows that UK equity allocations are declining, they will look at options to reverse this.

Encouraging increased investment in UK equities are clear first steps taken by this government to reinvigorate the UK equity market. At the same time, increased investment in UK listed assets should enhance the attractiveness of the UK stock market to fast growing innovative companies. If this happens, it will allow UK pension funds to share in the capital growth and success of such companies. It is a virtuous circle.

3. A reduction in national insurance contributions

An additional 2% reduction in national insurance tax contributions will put more pounds in the pockets of UK consumers. This change will also take effect in the same month as the 12% reduction in the price cap for utilities and the 10% increase in the national living wage. An increase in real wages and disposable income should benefit the more domestic small-cap index which includes housebuilders, retailers and travel and leisure stocks.

 

Glossary

Equity – A security representing ownership, typically listed on a stock exchange. ‘Equities’ as an asset class means investments in shares, as opposed to, for instance, bonds. To have ‘equity’ in a company means to hold shares in that company and therefore have part ownership.

Index – A statistical measure of group of basket of securities, or other financial instruments. For example, the S&P 500 Index indicates the performance of the largest 500 US companies’ stocks. Each index has its own calculation method, usually expressed as a change from a base value.

 

Disclaimer:

Not for onward distribution. Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. This is a marketing communication. Please refer to the AIFMD Disclosure document and Annual Report of the AIF before making any final investment decisions. Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

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Important information

Please read the following important information regarding funds related to this article.

Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. This is a marketing communication. Please refer to the AIFMD Disclosure document and Annual Report of the AIF before making any final investment decisions.
    Specific risks
  • Higher yielding bonds are issued by companies that may have greater difficulty in repaying their financial obligations. High yield bonds are not traded as frequently as government bonds and therefore may be more difficult to trade in distressed markets.
  • The portfolio allows the manager to use options for efficient portfolio management. Options can be volatile and may result in a capital loss.
  • Global portfolios may include some exposure to Emerging Markets, which tend to be less stable than more established markets. These markets can be affected by local political and economic conditions as well as variances in the reliability of trading systems, buying and selling practices and financial reporting standards.
  • Where the Company invests in assets that are denominated in currencies other than the base currency, the currency exchange rate movements may cause the value of investments to fall as well as rise.
  • This Company is suitable to be used as one component of several within a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested in this Company.
  • Active management techniques that have worked well in normal market conditions could prove ineffective or negative for performance at other times.
  • The Company could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Company.
  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • The return on your investment is directly related to the prevailing market price of the Company's shares, which will trade at a varying discount (or premium) relative to the value of the underlying assets of the Company. As a result, losses (or gains) may be higher or lower than those of the Company's assets.
  • The Company may use gearing (borrowing to invest) as part of its investment strategy. If the Company utilises its ability to gear, the profits and losses incurred by the Company can be greater than those of a Company that does not use gearing.
  • If the Company seeks to minimise risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or negative for performance.
  • All or part of the Company's management fee is taken from its capital. While this allows more income to be paid, it may also restrict capital growth or even result in capital erosion over time.