In the war on globalisation, head for the safety of small-cap stocks

Populist governments are gunning for large global multinationals. It might be time to diversify into small-cap stocks, says Merryn Somerset Webb.


The world's leaders are gunning for multinationals
(Image credit: 2017 Getty Images)

I have the answer to the question I know you have all been asking yourselves: Donald Trump is an alien. I know this because I have been reading the Fortean Times (the UK's best journal of the paranormal) and it seems that experiences of alien abduction in the 1980s and 1990s pretty much foretold his coming.

Alien sightings tend to occur just as society starts to look for "some sort of control that will replace social systems that are being perceived as betrayers". They come when "we are fixated on terror rather than on working through instability" and when (as a result) "culture is about to undergo profound change".

Think about this too much, and you will begin to worry that the majority of today's leaders are aliens. But you get the idea: Donald Trump's election is a major turning point. History will probably see it as the moment when globalisation finally met its maker.

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Voters, fed up with being told that their national leaders can't control interest rates (contracted out to the central banks), large corporations(they're global, we're just national), immigration or regulation (contracted out to the EU), and can't do anything about low wages (free trade is always good) have effectively asked them to try a little harder to act a little more sovereign.

They have not voted for less from politicians, but for much, much more. And they are getting it. Here in the UK, Theresa May is busy getting on with Brexit. And in the US, Trump appears to be in a constant state of campaign promise fulfilment motion.

This may be good for voter morale, but not much of it is good for very large corporations. The past 40 years have been all about trends that have worked for them. Their goods have been welcomed pretty much everywhere. Their labour bills have been falling fast (as they have offshored manufacturing, and embraced the "gig economy"). The price of their debt has been falling too.

They have got bigger (partially due to M&A driven by all that debt) the average public company in the US is now three times the size it was in 1997. Their tax bills have gone down as they have figured out how to work the global system, to the extent that a lot of people think we might as well just abolish corporation tax. And of course all of this has happened against a very benign ownership background: big institutional investors have had no interest in interrupting the financial beauty of globalisation to fret about its social implications, and the individual investor was effectively disenfranchised a decade ago (see my previous articleson this failure of shareholder capitalism).

This is changing. Debt will not stay this cheap rates will, rise of course, but worse will come if Trump goes ahead with plans to remove the "debt shield" to stop firms deducting interest costs from their tax bills. That will mean a direct hit to the profits of the indebted.

Labour costs are on the rise too. An increase in the minimum wage was on several state ballots in the US election it's already happened in the UK and trade unions in the West are beginning to stir again.

Protectionism is coming. There are physical walls popping up all over Europe (this stuff isn't confined to the US look at Austria and Slovenia) and it is pretty clear which direction free movement of people, goods and capital is going in. Research organisation Global Trade Alert was reporting even in 2015 that protectionist measures were up 50% year-on-year.

Companies can localise production and protect themselves to a degree (reshoring). But it won't be as cheap and easy as manufacturing everything in Vietnam or Slovenia and shipping it from there. Shareholders are beginning to think like long-term owners rather than just buyback cash collectors again. Finally, higher taxes are coming. May and Trump might both be talking about bringing rates down, but I think you can be sure that they intend those who create revenues in their economies to pay those rates not someone else's even lower rates.

Governments who need money go where the money is. Those who protest that individual countries can't control the global multinationals and the tax rates or the wages they pay have been blinded by the tax arbitraging of the last few decades. The truth is that countries can control anything they like within their borders that's sovereignty. So, for example, when Tim Cook announced that the EU's interfering in Apple's tax deal with Ireland was "total political crap", he was only half right. Crap, no. Political, yes.

There are signals all over the place that our new leaders are keen to make it clear that they not central banks, not supra-national organisations and not big corporations are in charge. Both May and Trump have suggested they want interest rates to rise. Both have talked about reining in corporate power about stopping profit shifting in particular, and about price caps. And even Trump's plan to slash regulation in the US should in some ways be seen as bad news for big companies.

Less regulation means more competition. As Albert Edwards of Socit Gnrale pointed out this week, the World Bank puts the US at number 51 on its list of ease of opening a new business across the world. That puts it below Russia, Belarus, Burundi, Egypt, Jamaica, Kosovo, Kyrgyzstan, Liberia, Mongolia and even France. It also suits incumbents not newbies.

So here's the question: if there is a huge shift in social attitudes under way, one that suggests the corporate sector is about to find out just how firmly sovereign democracies can intervene in globalisation when they get warmed up, where does safety in the markets lie?

Not, I think where it has for most of all of our careers in the very expensive shares of powerful multinational firms known for leveraging weak politicians and open borders into fortunes. If you haven't already started to diversify into small-caps, the frantic political activity of the past few weeks alongside the growing suspicion that there are now aliens among us might offer a hint that you should.

Small-cap investing is time consuming and risky for individuals, so this really is one area where I think you should trust a fund manager and preferably an investment trust manager (a long term outlook is more possible inside this structure). Trusts to look at include the River & Mercantile UK Micro, Gervais Williams' Miton Microcap Trust and Aberforth Smaller Companies (disclosure: a family member has a small holding in the latter). The Miton fund is trading on a slight premium to its net asset value, and the River & Mercantile is on a slight discount. However, the Aberforth fund (which is more small-caps than micro-caps) is trading at a discount of just over 14%, making it particularly attractive to value-seeking investors.

This article was first published in the Financial Times

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.