Aberdeen Smaller Companies Income Trust PLC

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An update from our co-managers, Abby Glennie and Amanda Yeaman - 1 December 2020

We believe that the turning point for markets was March this year. Financial authorities across the world had, by that time, introduced wholesale Monetary and Fiscal stimulus and interest rate cuts. This is generally good for equities and the world economy. Stock markets move in anticipation of an economic upturn, this is similar to the recovery in markets post the banking crisis of 2009. Smaller companies tend to lead the recovery and this is exactly what is starting to happen. Any lengthening of the Covid crisis with further lockdowns perversely is good for our Quality, Growth and Momentum process. When the vaccine news broke we saw a sharp  “dash for trash” phase and sectors that were badly hit by the pandemic such as travel, oil, property, retailers and cyclicals moved higher. This will likely lead to under performance by our process and we suspect this will be short lived. The vaccine news gives a trajectory for recovery  but we don’t think recovery happens overnight. The challenges of lockdown 2 and the logistics of the vaccine roll out will be significant and we don’t expect the recovery to be linear.  We aren’t out of the woods economically, we’ve had 10 months of extreme economic conditions with a scarcity of growth reflected in low bond yields and zero interest rates. If the vaccine does normalise society then we will see arithmetically the types of GDP numbers and broader economic data that we have never seen before but the numbers are still from a very low base and we still worry about unemployment, consumer confidence and volatility.

Our process remains the same. We back management teams with strong credibility, who have shown good leadership, decision making, and ability to steer their businesses in challenging environments. We have a strong track record of identifying companies with strong growth profiles, where they have many levers for growth. Where these business can still grow whilst growth overall is more scarce, they will be sought after. We historically gain our best periods of relative outperformance in tougher market environments. Our process has been tried and tested through over 20 years in the UK and in an environment where the outlook is uncertain, volatility persists and economic growth slows, we believe our approach stands us in a solid position.