It’s been a tumultuous 18 months or so for the global economy, financial markets, and for business. The word “unprecedented” is overused. But in the case of the pandemic – and the measures taken to contain it – it’s probably the only word that fits. Thanks to the rapid discovery and rolling out of vaccination programmes, we can at least be hopeful that the worst of Covid-19 is behind us in terms of outbreaks.
However, we’re now seeing a great deal of disruption to all parts of the global supply chain, as the impact of lengthy lockdowns, quarantine measures, and ongoing complications with cross-border travel collide with a recovery in demand. The cost of everything from energy to commodities to used cars has soared, while there are signs of longer-term inflationary pressure building in the form of worker shortages and demands for higher wages.
Despite all this, share prices have rallied strongly since their nadir in March 2020. The question now is, as the recovery runs into these headwinds, what does this mean for markets and for smaller companies in general? MoneyWeek executive editor John Stepek sat down with Roland Arnold, portfolio manager of the FTSE 250-listed BlackRock Smaller Companies Trust (LSE: BRSC), to get his view.
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The trust itself has been around in one form or another for more than 100 years. It has an excellent long-term track record, having comfortably beaten its benchmark in terms of both share price and net asset value total returns, over the past three, five and ten years. Arnold meanwhile has spent his entire career in UK equities, having joined BlackRock in 2000. He has been running BlackRock’s UK Special Situations fund since 2012. In April 2018 he was appointed co-manager of the Smaller Companies trust, before taking over sole management in June 2019.
“One of the most powerful things about small company investing is that these businesses tend to be more nimble,” says Arnold. “I’m working on the assumption that a large number of my companies are going to report issues with labour... with supply, with disruption – but those are short-term issues. Far more important is how they deal with it in the mid-to-long term.”
The crucial thing to remember, says Arnold, is that these are supply-side issues. That means supply will catch up before too long, and in the meantime, underlying demand remains strong, which is a long-term positive for companies. Indeed, despite the prominence of supply chain woes, Arnold believes that the industrial sector contains some of the most interesting opportunities as the world emerges into the post-Covid era.
The short-term gap between surging supply and demand represents one opportunity. But another, more lasting trend, is that as a result of the disruption caused by Covid, companies are likely to hold more inventory than in the past, as they decide that “just-in-time” is no longer the best business model. This should underpin demand in the sector for a long time to come, even after supply has caught up with the short-term backlog.
The fact that governments also went to great lengths to shield both consumers and businesses from the worst of the pandemic’s financial impact has also enabled some companies to use the pandemic to reconfigure their business models. For example, notes Arnold, in the retail sector, with furlough schemes temporarily removing a large proportion of staffing costs, some companies took the opportunity to renegotiate tenancies, and to broaden their market by increasing their sales through other channels, such as online. Those changes are now permanent and mean they will be coming out of the pandemic in better shape.
In short, there’s no doubt that the economy is facing some immediate challenges. But in the longer run, there are plenty of good reasons to be optimistic on the outlook for smaller companies in the UK. To find out more – and to get Arnold’s view on the value of meeting management teams, his take on private equity bids, and how he decides when it’s time to sell a stock – sign up to watch the entire webinar here.
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