By Ian McConnell

The UK’s recovery may be “punctuated by setbacks”, with the danger of further spikes in Covid-19 outbreaks, a vaccine “some way off” and “difficult” Brexit negotiations ahead, the managers of Standard Life UK Smaller Companies Trust have warned.

Harry Nimmo, Abby Glennie and Amanda Yeaman offer their views on the outlook in the latest results of the £553 million investment trust, highlighting an acceleration in the pace of change in the business environment arising from the Covid “emergency”. They flag, in this context, the importance of technological advances.

The managers say: “The chaos over Brexit and the political instability of the post-election May government has been almost forgotten in contrast to the real and immediate dangers of Covid-19.

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“Our view is that we have passed the worst in stock market terms and that 19 March 2020 might have been the low point. However, with the potential for further spikes in Covid outbreaks, a vaccine some way off, and a difficult negotiation on Brexit ahead, the recovery may be punctuated by setbacks.”

Weighing the outlook, they add: “We are of the view that the Covid emergency has accelerated change in what has always been a dynamic business environment. This means that the internet of things, cloud computing and all the other technological breakthroughs will continue to increase the level of corporate Darwinism evident in the world. This encourages our thinking that growth, along with quality and momentum, must remain central to the process.

“There is the possibility that we will see a ‘dash for trash’ rally at some point as we adapt to the new world order. Were this to occur, there may be a period where we see significant outperformance for cyclical, slow-growth industries where companies are on low traditional valuations. They, however, can be traps for the unwary.”

The managers note the trust’s key sector exposures include software, support services, speciality financials, leisure goods, media, real estate, food manufacturing, telecoms and electronics.

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They emphasise there are no holdings in the mining or oil and gas sectors, and no materials stocks such as paper and packaging, industrial minerals or chemicals companies.

The managers add that Standard Life UK Smaller Companies Trust “remains light in the more cyclical sectors such as housebuilding, building materials, transport and leisure”.

They observe that the sectors which increased in weighting during the year to June 30 “were generally the most resilient in the Covid emergency, such as wealth management platforms (AJ Bell) and fund administration platforms (JTC, Sanne), leisure goods (Games Workshop, Focusrite, Team17), self-storage (Safestore, Big Yellow) and media (Future, GlobalData)”.

The investment trust outperformed its reference index significantly over the year to June but nevertheless expressed regret that it had recorded a second consecutive year of negative total return.

Standard Life UK Smaller Companies recorded a negative total return on net asset value of 0.5 per cent over the year to June. This was a much better showing than the negative total return of 10.7% on the Numis Smaller Companies plus AIM (ex-investment companies) Index.

Chairman Liz Airey said: “This is, regrettably, the second year in a row that we have had to report negative absolute returns to you albeit also a second year of meaningful outperformance against the reference index.”

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She added: “The Brexit negotiations appear to be making slow progress and given the limited time to complete them, the possibility of a hard Brexit remains. These events are coming on the back of the Covid crisis, which caused much of the global economy to come to a sudden halt. The level and speed of the return of economic activity in many sectors is unpredictable given that the virus has not been overcome, there is no vaccine and there is a great deal of concern about the likelihood and impact of a second wave.

“Against such a backdrop, it must be assumed that the UK’s path to recovery will be patchy and may suffer setbacks before it is fully established.”

The trust is proposing a final dividend of 5p-a-share, making a total of 7.7p for the year to June. This total payout is the same as that for the prior 12 months.