Since the United States and Israel launched strikes on Iran in late February, the Strait of Hormuz – the narrow channel between Iran and Oman through which around a fifth of the world’s seaborne oil normally passes – has been effectively closed to normal shipping.
The oil price remains sharply elevated, inflation expectations have shifted, and interest rate paths that looked relatively clear at the start of the year are being redrawn. At the time of writing, a fragile ceasefire holds but the situation remains uncertain and unresolved.
In this article, we look at some of the implications of conflict in the Middle East for US smaller companies and JPMorgan US Smaller Companies Investment Trust (JUSC) in particular.
Energy self-sufficiency is a relative positive for the US
Clearly, no region or asset class can emerge unscathed from a major global conflict and the economic disruption that it brings. But in some respects, the United States is positioned better than other regions. That’s because it is largely energy self-sufficient, producing more domestic energy than it consumes and relying on Middle Eastern oil to a far lesser extent than most other major economies. While no economy is fully insulated from higher oil prices, the US entered this period of uncertainty from a position of relative strength – and with considerably less at stake in the diplomatic implications than many of its peers.
US smaller companies are typically less exposed to global headwinds
That relative advantage is particularly relevant for the kind of business that JUSC invests in. US smaller companies tend to source more locally, sell more domestically, and carry far less exposure to disrupted global trade routes than the multinationals that dominate the S&P 500. Energy markets are global, so there is no escape from the cost inflation that stems from higher energy prices. But, on balance, the broader implications of the conflict in the Middle East weigh less heavily on these smaller companies than they do on more internationally exposed businesses.
The case for quality
History consistently demonstrates that, during periods of genuine market stress, businesses with quality characteristics such as resilient balance sheets, durable competitive advantages and dependable earnings have tended to hold up better – and to recover more strongly when conditions improve.
Quality is not a guarantee of outperformance in every environment. Indeed, it has had a difficult period recently, as markets have rewarded more speculative, higher-risk companies over those with the financial resilience and earnings dependability that JUSC targets. But history suggests these phases do not last indefinitely – and with quality within the US smaller company universe sitting in the most attractive valuation territory seen in years, the conditions appear supportive for a recovery. For patient investors, that combination is worth noting.
Staying the course
The near-term outlook remains genuinely uncertain, but JUSC’s approach – identifying high-quality businesses with durable advantages and backing them with valuation discipline – should stand it in good stead through any near-term volatility and, ultimately, support a longer-term recovery.
For investors looking for exposure to the domestic heart of corporate America, the investment case for JUSC remains robust. Geopolitical turbulence always feels uncomfortable, but quality businesses, patiently held, have a long track record of coming through it in good shape.
Summary Risk Indicator
The risk indicator assumes you keep the product for 5 year(s). The risk of the product may be significantly higher if held for less than the recommended holding period.
Investment objective
The Company aims to provide investors with capital growth by investing in US smaller companies that have a sustainable financial competitive advantage. As the emphasis is on capital growth rather than income, shareholders should expect the dividend to vary from year to year. The Company focuses on owning equity stakes in businesses that the manager believes trade at a discount to intrinsic value, with strong management teams. The Company has the ability to use borrowing to gear the portfolio within a range of 5% net cash to 15% of net assets.
Risk profile
Exchange rate changes may cause the value of underlying overseas investments to go down as well as up. External factors may cause an entire asset class to decline in value. Prices and values of all shares or all bonds and income could decline at the same time, or fluctuate in response to the performance of individual companies and general market conditions. This Company may utilise gearing (borrowing) which will exaggerate market movements both up and down. This Company invests in smaller companies which may increase its risk profile. The share price may trade at a discount to the Net Asset Value of the Company. The single market in which the Company primarily
Investment Performance:
Past performance is not a reliable indicator of current and future results.