Key takeaways

  • Low valuations in UK small caps create an asymmetrical opportunity set – precisely because there is no obvious catalyst
  • Catalysts – such as defence stocks benefiting from the outbreak of war – only become obvious with the benefit of hindsight
  • The most attractively valued companies are often those where there is no obvious reason for an uptick in performance

Defence has been one of the best-performing sectors in recent years. The catalyst for this is obvious. When Russia invaded Ukraine, governments across Europe realised they would need to buy every bullet, tank and drone they could lay their hands on. 

But this catalyst was only obvious in hindsight. You could have bought (and done very well from doing so) on the day the conflict began, but that decision could have swiftly looked foolish if the war had proved to be short lived. 

Perhaps the true catalyst was not the invasion itself, but the gradual realisation that this would evolve into a multi-year war, triggering rising defence budgets across Europe. But what’s the use of that? As an investor you would have always been behind the market if you had waited for evidence of the conflict’s ongoing nature.

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