2021 Outlook: UK Small-Cap Equities

The COVID-19 crisis has polarised the fortunes of smaller companies: some have been hard hit, while others have taken significant market share. After a year of extreme challenges, Dan Whitestone, Portfolio Manager of the BlackRock Throgmorton Trust plc, explains why he is backing the advantaged and the differentiated as the economy recovers.

Capital at risk.The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

The Brexit resolution is the removal of a huge cloud of uncertainty that has significantly impacted valuations across small and mid-cap companies, and so it would not surprise us at all to see more inflows into this part of the market. Many small and medium-sized companies have performed well through this difficult period, reflecting the strength of their offering and the global universe they serve. This rising tide should lead to a re-rating in valuation for many of our holdings.

History has shown that crises accelerate industrial trends, market share shifts, and changes in consumer behaviour. We thought this would be the case with COVID-19, but we have still been surprised by the sheer speed and scale of the level of dispersion of financial performance that it has created across industries and companies. Some companies have been hit hard while others have been able to take market share at an accelerated rate. We remain of the firm belief that there remain sizeable opportunities for companies that can differentiate themselves and/or exposed to long-term secular trends, while the pressure on balance sheets and cashflows for struggling companies is intensifying.

Going forward, we expect two major trends to dominate at the stock and industry level: the first is digital transformation, which has been accelerated by COVID-19. We own many companies well placed to benefit from this. Second is “Corporate Darwinism” (the strong getting stronger) unfolding across many industries as the differentiated and financially strong take market share at an accelerated rate from the weak and solidify their market leading positions. We already see growing evidence of this across retail, veterinary services, electrical component distribution, building materials to name just a few.

By focusing on stock and industry analysis and backing the advantaged and the differentiated, we believe the Trust remains well set to capitalise on the opportunities ahead. 2020 has been a year of extreme challenges but we truly believe that stock and industry specifics can triumph over macro factors, and most importantly, this Trust has an excellent toolkit to take advantage of the full opportunity set presented by our universe.

This material is not intended to be relied upon as a forecast, research or investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are from BlackRock as of January 2021 and may change as subsequent conditions vary.

Dan Whitestone
Portfolio Manager, BlackRock Throgmorton Trust plc