Aberdeen Smaller Companies Income Trust PLC

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An update from our investment manager, Abby Glennie - 10 September 2020

We hope that the worst of the Covid-19 pandemic is behind us, but it has left us with many challenges ahead. Fears are rising of another wave of infections, meaning we are still in an uncertain environment. We are hopeful that the health impacts of the increase in positive cases look limited, and this should be manageable and the NHS in a strong position to cope with any second waves. Further lockdowns or restrictions will bring more misery to sectors that have already been hit the hardest, such as travel and leisure.

Front of mind this month is the end of the furlough scheme. The scheme has been effective at keeping unemployment down at the peak of the crisis but as the scheme unwinds and the economy continues to operate below capacity, unemployment could rise significantly. The true impact on the labour market won’t be clear until winter. The government has an important role to play, they’ll need to continue to support the economy short term, and importantly prepare it for a different future. Initiatives to ‘upskill’ a significant part of the workforce and upgrading infrastructure to cope with permanent change in some sectors could help support unemployment and economic growth. There is likely to be a mix shift in the economy, with relative strengths of sectors that have benefited from lockdown trends compared to GDP losses in other sectors. The full economic recovery requires a viable solution to Covid-19. Whether it is herd immunity, a vaccine or something else, we still don’t have certainty. With volatile news on vaccine progress, a clear solution could be some way off. 

We also have to pay for the lockdown. Headlines are dominated now with tax rises on wealth creators but we need a pro-growth strategy to truly rebuild the economy again. Without a clear policy, uncertainty and fear will persist. As the final deadline for Brexit approaches we have yet more uncertainty to deal with. The backdrop now is very different to what it was last year and late stage negotiations may well lead to a messy departure. A no deal Brexit could exacerbate the economic crisis. Currency and equity markets haven’t yet reacted too much to this but as focus shifts back to the negotiations we are likely to see volatility. Further afield, the US presidential election is very close to call and this will become a bigger focus next quarter. 

Our companies have navigated the immediate impact of the lockdown and are now looking at what comes next as they adapt to the change in economic environment and structural changes underlying that. For us we have now had more clarity from companies as guidance has come back into the market. Generally we have been pleased with how our companies have reported and some have resumed payments sooner than expected. With policies changing rapidly, recovery uncertain and the Covid-19 consequences not yet fully played out, companies are still carefully managing the balance of capital allocation. Businesses are balancing opportunities with challenges, and for some having the confidence to restart dividend payments is not yet certain enough. 

With high levels of uncertainty in a number of areas, we believe our focus on Quality business will steer us well; resilient companies who are trading well, have balance sheet strength, strong ESG credentials, and experienced talented management teams at the helm. We invest in businesses who have many levers for growth, and who we believe can grow despite economic headwinds. We believe these quality growth businesses will become more sought after in tough environments.