Over the last decade, stock market returns have been excellent. Over the 10 years to 22 April 2025, the Magnificent Seven soared by a factor of 21.6 in sterling terms.
Good news, surely? Well, yes and no. High returns are wonderful. But when supersonic returns persist for years and years, they breed two deep-seated problems.
Firstly, they horribly distort investors’ behaviour. Risk-seeking becomes ingrained. And when the music stops, the riskiest stocks suffer massive setbacks. Risk-seeking positions suffer giant, permanent losses of capital.
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Secondly, outright winners often have a degree of similarity. Persistent success leaves the market littered with correlated positions. That doesn’t matter on the way up, but at the peak, it does.
So what can market participants do? When the market’s patterns change, we would argue that we all need to root out holdings that are somewhat correlated with the winners. We have a saying that when it comes to moments of change, make sure you change enough. So if the Magnificent Seven are over, where to go?
Our view is to go for those with the opposite characteristics: not all-out cash-flow draining growth, but persistent expansion and bountiful cash flow. Not US-listed, but UK-quoted. Not mega cap, but multi cap, including small and micro caps. Fortunately, the Diverse Income Trust has a whole portfolio full of such companies. We think we are at the start of a new UK supercycle.
Profiting from protectionism
Globalisation may have supplied more of everything, but with protectionism, expect either intermittent shortages of regular lines, or, when a distant retailer goes bust, a market suddenly flooded with containers full of things sold off cheaply.
For retailers, all this stop/start will be a nightmare. Conversely, online category killers should have a disproportionate advantage. Their offerings can change hourly, and when they buy job lots, they can pass on the giant savings. Most shoppers aren’t after a specific brand of new fridge, freezer, or bathroom basin.
They want choice: great products at great prices, delivered the next day. In our view, both AO World (LSE: AO) and Victorian Plumbing (Aim: VIC) are set to expand and generate bountiful cash flow.
Defence spending, meanwhile, is set to rise, not on fighters or tanks, but on drones – loads of them. Development cycles will be short, incorporating all the latest technologies.
This will put defence control systems under pressure to keep up; they will need to be upgraded all the time. Concurrent Technologies (Aim: CNC) designs and supplies sophisticated defence computer boards. Over recent years, the company has won a series of ever larger orders. In our view, this is just the start.
A winner in online gambling
Regulated online gambling is rolling out across major economies, such as the US. Competitors need winning games, and Slingo is one of the most popular. Gaming Realms (Aim: GMR), a UK-quoted micro-cap, owns it.
Gaming Realms already has net cash on the balance sheet, with yet more cash piling up at an accelerating pace. During the mega-cap era, the problem was that some micro caps were just too tiny and hence too cheap for professional investors to consider. Yet when they start to appreciate, institutions suddenly discover them, and their share prices can swiftly rise dramatically.
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