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    1. Mercantile Investment Trust news | J.P. Morgan Asset Management

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    The Mercantile Update, December 2022

    Good reasons to view the outlook with confidence

    The Mercantile invests in high quality, resilient UK businesses capable of withstanding near-term uncertainties and set to benefit from structural growth over time. The Company focuses on mid and small cap stocks, as these businesses typically grow faster and generate higher long-term returns than larger, less innovative companies, and thus possess the greatest capacity to transform into future market leaders.

    Like most equity investors with a quality and growth bias, The Mercantile’s performance has suffered during recent market volatility, and the short-term economic outlook undoubtedly remains challenging. Consumer demand will weaken as discretionary income is eroded by mortgage rate and cost of living increases, and companies are likely to curtail investment plans until they have more clarity on the economic and geo-political outlook.

    To strengthen the Company’s capacity to withstand these near-term difficulties, The Mercantile’s manager has made some significant portfolio changes. Most notably, he has reduced its overweight to consumer discretionary, as he expects this sector will be worst hit by rising rates and prices. Some of the proceeds of this portfolio adjustment have been used to increase exposure to energy. The Company had limited exposure to this sector since the beginning of the pandemic, but in late 2021 the manager opened a position in Serica Energy, a North Sea gas producer. Since then, the war in Ukraine has increased demand for oil and gas and the manager has added a position in another producer, Harbour Energy, and acquired or topped up positions in companies such as Hunting, IMI and Rotork, which provide equipment and services to the energy sector. Defence holdings have also increased, with a long-standing investment in QinetiQ supplemented by a new position in Chemring.

    What is the Mercantile Investment Trust outlook for 2023?

    With these changes in place, The Mercantile’s manager is cautiously optimistic about the outlook for 2023 and beyond, for several reasons. Firstly, the portfolio is well-positioned to withstand any further near-term negativity, and to benefit from recent developments such as rising energy prices and escalating defence spending. Second, he expects inflationary pressures to ease next year, as pandemic-related supply chain constraints dissipate, labour market conditions normalise and the squeeze on consumer spending eases retail price pressures. This may allow central banks to signal an end to aggressive policy tightening, which should support the valuations of the quality and growth stocks the manager favours.

    Third, with so much gloomy news now priced into equity markets, the valuations of many interesting companies are, arguably, looking particularly compelling, offering an appealing entry point for long-term investors. The UK market also remains attractively priced relative to its counterparts in other industrialised economies. In addition, FTSE 250 companies have, for some time, been subject to M&A activity, and foreign investors may be further tempted by the current historically low level of sterling. These valuation factors should underpin the market over time. And as and when economic and market conditions begin to improve, The Mercantile’s manager has significant gearing capacity at his disposal to enhance returns by leveraging into a rising market.

    In the meantime, the Company continues to offer shareholders a competitive, and rising, dividend - a particularly important consideration given recent cost of living increases. The Mercantile’s Board aims to deliver dividend growth in line with inflation over the long term. It has never cut the dividend, even during the pandemic, when many portfolio holdings were forced to suspend dividend payments. Instead, the Board drew modestly on the Company’s ample reserves to supplement its dividend payouts. While the outlook for 2023 dividends is somewhat uncertain, it is reasonable to expect that, if necessary, the Board will once again draw on reserves to maintain the Company’s dividend track record.

    Conclusion

    In sum, there are good reasons to share The Mercantile manager’s cautious optimism about the future. And investors may draw further confidence from his track record of long-term outperformance, which attests to his skills in identifying great, innovative companies capable of delivering attractive returns - and leading the way to better times ahead.

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    This is a marketing communication and as such the views contained herein do not form part of an offer, nor are they to be taken as advice or a recommendation, to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Changes in exchange rates may have an adverse effect on the value, price or income of the products or underlying overseas investments. Past performance and yield are not reliable indicators of current and future results. There is no guarantee that any forecast made will come to pass. Furthermore, whilst it is the intention to achieve the investment objective of the investment products, there can be no assurance that those objectives will be met. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our EMEA Privacy Policy www.jpmorgan.com/emea-privacy-policy. Investment is subject to documentation. The Annual Reports and Financial Statements, AIFMD art. 23 Investor Disclosure Document and PRIIPs Key Information Document can be obtained free of charge from JPMorgan Funds Limited or www.jpmam.co.uk/investmenttrust. This communication is issued by JPMorgan Asset Management (UK) Limited, which is authorised and regulated in the UK by the Financial Conduct Authority. Registered in England No: 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP.

     

    Investment Objective: Aims to achieve capital growth through investing in a diversified portfolio of UK medium and smaller companies. It pays quarterly dividends and aims to grow its dividend at least in line with inflation. The Company’s gearing policy is to operate within a range of 10% net cash to 20% geared.

     

    Key Risks: 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 may also invest 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 invests, in this case the UK, may be subject to particular political and economic risks and, as a result, the Company may be more volatile than more broadly diversified companies. Companies listed on AIM tend to be smaller and early stage companies and may carry greater risks than an investment in a Company with a full listing on the London Stock Exchange.

     

    Risk Indicator: Risk 5*

    *The risk indicator goes from 1 (lower risk) to 7 (higher risk).

     

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