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Written by: Darius McDermott
20/05/2021
“This is not a recovery, it’s a re-opening of the economy.”

Whether it’s Zoom calls, investment commentary, podcasts or emails – that’s the line I often read from fund managers and economists across the UK.

This week marks the latest stage in that re-opening: pubs, restaurants and hospitality venues can open indoors, with the rule of Rule of Six in place inside, and groups of up to 30 outside too. And then – all things being equal – it’s only a few weeks before most other restrictions are dropped. The vaccination story in the UK has been an undoubted success, with more than 54 million doses given and 18.4m people having had both jabs*.

With a third lockdown in place, the UK economy shrank by 1.5% per cent in the first three months of 2021**, but gathered momentum in March as lockdown restrictions began to ease. The reopening of schools and strong retail spending helped the economy grow 2.1% in March, but the economy is still 8.7% smaller than it was before the pandemic**.

Normally that would be a concern, but given the tumultuous uncertainty of the pandemic, it actually shows the resiliency of the UK economy. The outlook is reasonably optimistic – latest unemployment figures are now below 5%***, while the International Monetary Fund has projected growth of 5.3% for the UK in 2021 (compared to a 10% fall in 2020)****.

But is there still an opportunity to tap into this re-opening trade? We are long-term investors and, as such, we always believe the greater opportunities will come in the small and mid-cap space. History shows the extra risk taken in this area is often rewarded, and I do not see why it would be any different in this case.

It’s no secret UK medium and smaller companies have been through the wringer in the past five years, courtesy of Brexit and the Covid pandemic, therefore I was pleasantly surprised that both indices recently approached all-time highs^. Since the lows of March 2020, the FTSE 250 has risen almost 74%, while the FTSE Small-Cap has risen 96%^^.

In any normal situation, now would probably be the time to think about cashing in – but on this occasion it is different, and that’s where the re-opening rather than recovery statement is emblazoned in my thoughts.

The re-opening trade is interesting for mid-caps in particular as the FTSE 250 has had a number of companies which have faced significant challenges due to Covid – the likes of airlines, travel companies, restaurants and pub chains. Some sectors have already bounced post the vaccine announcement, but others could still make big gains once the economy re-opens fully. Consolidation is inevitable, but this means there will be big winners in all those sectors too, highlighting the importance of an active manager.

The same argument is also extended to smaller companies. We’ve now moved into an environment where mergers and acquisitions – an important part of the small-cap space when it comes to making profits – could well pick up as the combination of low interest rates and a weaker pound peaks the interests of potential buyers.

Of course, not everyone will succeed as we get our ‘new normal’ – there will be companies who struggle as financial support from governments and central banks is turned off – but there will be opportunities in equal measures in this unique time in markets.

Vehicles worth considering include AXA Framlington UK Mid Cap and TM Tellworth UK Smaller Companies funds. Alternatively, VT Downing Unique Opportunities has almost 90%^^^ invested in mid and small caps, while Liontrust Special Situations has 36%^^^ in these parts of the market and 22% in AIM – home also to many small and medium-sized firms.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.

*Source: Our world in data – figures at 11 May 2020

**Source: bbc.co.uk

***Source: ons.gov.uk

****Source: International Monetary Fund – World Economic Outlook – April 2021

^Source: Stifel – UK Mid and Small-Caps – April 2021

^^Source: FE fundinfo, total returns in sterling18 March 2020 to 12 May 2021

^^^Source: fund factsheet, 31 March 2021

 

Darius McDermott is managing director at Chelsea Financial Services

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