The Mercantile’s managers seek out small- and medium-sized UK companies set to become the market leaders of tomorrow
October 2024
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It is well-documented that seven large US tech companies - Apple, Microsoft, Meta, Amazon, Alphabet, Nvidia and Tesla have dominated US stock market growth in recent years, however it is worth remembering that most of the “Magnificent Seven” only started their journeys in the last 20 to 30 years. Many of the companies that will excel in this new, rapidly evolving world do not even exist yet, or are in the very early phases of development. The UK market has the potential to spawn some of these future winners which are precisely the kind of businesses targeted by The Mercantile Investment Trust. The Mercantile’s managers seek out small- and medium-sized UK companies set to become the market leaders of tomorrow, including those at the heart of the tech revolution.
Since the launch of ChatGPT in late 2022, investors have become very excited about artificial intelligence (AI) and its potential to revolutionise the way we work and live. Much of this excitement has been channelled into a handful of US technology stocks, the so-called ‘Magnificent Seven’ - Nvidia, which makes the cutting-edge semiconductor chips that drive AI tools, household tech-related names Apple, Microsoft, Amazon and Tesla, along with Meta Platforms, formerly known as Facebook, and Alphabet, the parent of Google. These companies are widely perceived as the major beneficiaries of the AI revolution, and all but Tesla have made extraordinary gains and dominated global equity indices over the past year. Nvidia has led the way. Its share price has risen by more than 250% over this period, while Meta’s has climbed by over 180%.1
Such hefty share price gains have led to speculation that this rally will soon run out of steam, and some investors may fear they have missed their chance to gain exposure to the AI boom. However, these concerns are not justified. On the contrary, AI is still in its nascent stages, and is likely to play out over many years, if not decades, just as the Industrial Revolution, which began in Britain in the mid-eighteenth century, continued for almost a hundred years, and was still impacting less advanced economies well into the twentieth century.
And by its very nature, AI will not be confined to a few US tech companies. Demand for semiconductors is already lifting the stock prices of chip makers around the world, most notably Taiwan Semiconductor Manufacturing Company (TSMC), South Korea’s Samsung Electronics and SK Hynix, and Dutch producer ASML. And this pervasive technology is permeating many other sectors of the market. Electric and self-drive vehicles and robotics may be the most well-recognised applications, but the list is growing rapidly. AI is integral to the next generation of smartphones and personal computers and will greatly enhance commercial software applications in areas such as marketing, customer services and business administration. This technology also requires massive data storage and processing facilities, and energy infrastructure to run servers and keep them cool. And none of this is possible without base metals such as copper and lithium, which are essential inputs for electronic devices and the batteries that power them.
When considering the potential trajectory of this structural megatrend, it is worth remembering that most of the Magnificent Seven only started their journeys in the last 20 to 30 years. It is likely that many of the companies that will excel in this new, rapidly evolving world do not even exist yet, or are in the very early phases of development. The UK market is likely to spawn some of these future winners. Britain is well-established as a major tech hub, trailing only the US and China. 2 In the mid-2010s, the UK, and London in particular, saw a boom in fintech, inspired by the City’s position at the centre of the global financial services sector. Since then, a start-up ecosystem has developed, leveraging talent nurtured in the country’s top-tier universities. Over 3 million people now work in UK tech3, and the sector attracts more start-up funding than any of its European competitors4. Such a supportive climate has fostered tech enterprises specialising in many fields, including cybersecurity, business software and food delivery.
These innovative, dynamic companies are precisely the kind of businesses targeted by Mercantile Investment Trust. Its managers seek out small- and medium-sized UK companies set to become the market leaders of tomorrow. So, it is not surprising that the trust offers investors significant exposure to UK businesses at the heart of the big tech revolution. Around 10% of Mercantile’s portfolio is invested in tech stocks. Key positions include Softcat, a reseller of IT products, software and management services, and Computacenter, a leading tech services provider to large corporate and public sector organisations. Mercantile also holds Bytes Technology, one of the UK’s largest providers of software, security and cloud services. These companies have all seen increased demand, growing market shares and significant share price gains over the past year and should continue to thrive as businesses step up their investment in AI and tech infrastructure.
Mercantile has further exposure to this trend via holdings in several other areas, including industrials such as Oxford Instruments, a supplier of semiconductor components, and QinetiQ, which offers AI, robotics and energy infrastructure and services to various sectors, including aviation, utilities, financial services, telecoms and government. The trust’s position in Hunting, an oil and gas equipment and services supplier, is well-placed to benefit from increased demand for the energy infrastructure needed to support power-hungry AI processors and the data centres that house them, while its small holding in Central Asia Metals provides exposure to the rapidly growing demand for copper.
Mercantile’s managers are forward looking and ever vigilant for new opportunities across all areas of the market. Technological integration is likely to be the most significant structural theme driving equity markets for the foreseeable future, and investors can be confident that Mercantile will be amongst the first investors in the next wave of UK companies set to profit directly or indirectly as the AI revolution plays out around the world.