Practice sessions in the ancient Japanese sport of sumo feature a ritual known as moshi-ai. In more mundane Western settings – say, a gathering around a pub pool table – the equivalent would be “winner stays on”.
What perhaps sets the sumo version apart is the choreographed scramble that follows each bout. It is customary for all wrestlers to eagerly volunteer to be the next challenger, even if they know they will be hopelessly outmatched.
Tradition dictates that they surround the victor and jostle for position, hands raised, excitedly pleading to be picked. Having been selected, more often than not, the chosen one is rewarded with a merciless pummelling.
A similar spectacle has played out in equity markets in recent years. The US has been the serial winner – the yokozuna, as they say in sumo circles – while other countries or regions have been portrayed as mere pretenders.
Again and again, month after month, American companies have reigned supreme. Others have valiantly endeavoured to measure up – usually conscious that they have little or no chance – and have been swept aside.
Crucially, most have also been ignored. Like those ever-eager fighters whose attempts to gain attention are repeatedly rebuffed, non-US markets’ desperate cries of “Pick me! Pick me!” have routinely gone unremarked.
Yet all this could be changing in a way few foresaw. Contrary to most expectations – very possibly including his own – some of the biggest victims of the fallout from President Trump’s tariff announcements have been the US companies he is so keen to strengthen.
As a result, for the first time in what seems like an eternity, other markets are finally getting noticed again. Even more significantly, there is increasing reason to believe they can match up to the multiple champ.
UK equities have been waiting for this kind of boost for quite a while. Especially in the case of smaller companies, which are often strongly placed to take advantage of emerging opportunities, the grounds for investing could be more compelling now than they have been for several years.
Seeing long-held attractions in a new light
There have been false dawns before, of course. Investors have been seeking a catalyst to reignite their interest in UK businesses ever since the dark days of COVID-19 – and in some instances, it might be argued, ever since Brexit.
It is important to stress at this point that many smaller companies in particular have not lacked appeal during this difficult period. They have demonstrated resilience, agility, impressive management and other praiseworthy attributes. Nonetheless, most investors have remained unmoved.
Consequently, there was no turnaround in fortunes when a lengthy spell of post-pandemic, sky-high inflation came to end. Falling interest rates also failed to move the needle. Even the election of a new government and the promise of political stability had no great effect – mainly because that promise went unfulfilled.
But it turns out that expecting something good to happen was the wrong approach. Disruption has instead arrived in the form of something bad: the market mayhem arising from the prospect of a worldwide trade war.
The so-called Magnificent Seven technology stocks – for so long the yokozuna of the equities arena – have been among the most high-profile casualties of Trump’s Liberation Day announcement. Along with those of many other US companies, their wildly fluctuating share prices have underlined the fragility of investment approaches centred on only a handful of businesses, a single index or one country.
So what do the most promising UK small-caps bring to the ring in the wake of this shake-up? Essentially, they bring what they have always brought: dynamism, innovation, a history of long-term outperformance versus their large-cap counterparts, adaptability, relative value and a notable capacity for growth over time.
The key difference today is that these businesses can at last be viewed in a deservedly positive light. Investors have been reminded that diversification matters and that it can pay to cast their nets more widely. With US equities conspicuously wavering, the UK market has assumed an air of comparative calm. We are back on the map.
Ultimately, capital is both global and fickle. It goes wherever it believes it will find decent returns. With that reality in mind, UK equities can now raise their hands without undue fear of being shunned or, worse still, thoroughly battered by the opposition in the style of the most brutal moshi-ai.
As it happens, a professional sumo tournament is due to be staged at the Royal Albert Hall later this year. It will mark the first visit to Britain by the sport’s top stars since the 1990s. In my opinion, now is an excellent time for the broader investment community to make its own long-awaited return to the UK.
Eustace Santa Barbara is co-manager of the IFSL Marlborough Special Situations, UK Micro-Cap Growth and Nano-Cap Growth Funds.
