Consumers are keen to get out and spend when it is safe to do so.
The much reported ‘pingdemic’ has caused hundreds of thousands of employees to self-isolate for ten days when alerted by the NHS Test and Trace app. But what impact are these labour shortages having on investment companies’ holdings? And how has the opening up of the economy affected investee companies?
How are current labour shortages impacting investment company portfolios and how are companies adapting?
Gervais Williams, Co-Manager of The Diverse Income Trust, said: “One of the features of this economic recovery has been a critical shortage of all sorts of resources across a wide range of businesses, which in many cases includes a critical shortage of staff. Overall, we have always prioritised investment in stocks where the management teams excel in terms of staff motivation. Over the pandemic this factor has become a lot more important, and the best managed businesses are continuing to successfully recruit, whilst weak businesses will become even more vulnerable. Specifically, we have encouraged many of our quoted companies to include a lot more detail on this issue in their presentations, and in the annual report, as in time we believe the best companies will justify higher valuations.”
Abby Glennie, Co-Manager of Standard Life UK Smaller Companies Trust and Aberdeen Smaller Companies Income Trust, said: “The areas where we are seeing the greatest labour constraints in the UK would be in technology such as software developers, alongside the headlines around lorry drivers and freight. Many companies have talked about the demand for technology skills driving up salary inflation, particularly in some regions such as Manchester. Video game companies like Team 17 (LSE:TM17) (held through Standard Life UK Smaller Companies) are based regionally in Nottingham and Wakefield which helps them access regional talent. The same is true for Kainos (LSE:KNOS) in Belfast.
“We see companies broadening their bases, both within the UK and internationally, to attract wider talent pools. The shortage of lorry drivers appears to be driving up freight costs, which have also increased heavily on a seaborne basis. Our quality businesses with strong supply chain relationships have been able to limit shortages and delays, and are also in a good position to pass on some of these inflationary cost pressures.”
Alasdair McKinnon, Manager of the Scottish Investment Trust, said: “Labour shortages have been most acute in segments of the economy where wages tend to be lowest. Inevitably, that extends to some of the service sectors most exposed to the reopening. However, we look for companies that have the ability to sustainably improve earnings, not just off 2020’s depressed base. In our book, rising wages and prices are the very definition of inflation. Central bankers take a different view, believing the phenomenon to be transitory. We believe that an era of higher inflation will be persistent and that will feed through to sales growth as well.”
What effect has the opening up of the economy had on investment company investee companies?
Alasdair McKinnon, Manager of the Scottish Investment Trust, said: “Share prices don’t wait for the fact, so the increased activity from July’s reopening brought no real fireworks to stock markets. Well before July, we had been adding to companies where we saw pent-up demand and strong balance sheets. While the rampant pinging of instructions to self-isolate highlights that a full reopening of the economy will not be a linear process, the direction of travel is clear – consumers are keen to get out and spend when it is safe to do so. We view our holdings in US restaurant chain Cheesecake Factory, US theme park operator Six Flags and UK-based hotel group Whitbread (LSE:WTB) as major beneficiaries of the reopening.”
Abby Glennie, Co-Manager of Standard Life UK Smaller Companies Trust and Aberdeen Smaller Companies Income Trust, said: “We have limited exposure to lockdown stocks that have been unable to operate through Covid restrictions. One name we do own (through Standard Life UK Smaller Companies) is Jet2 (LSE:JET2) and they continue to be challenged by the uncertainty around international travel. We believe their strong balance sheet will see them through this period of inactivity, with the potential to gain market share through their strong brand, customer service and offering. As the operating environment normalises, we believe they will be well placed to expand, both through number of aircraft and locations. However, the start/stop reopening of the travel industry has been a frustration for them, driving an inability to make commitments to a reopening schedule.
“Hollywood Bowl (LSE:BOWL) is another business which has faced months of uncertainty, with bowling highly restricted in the reopening schedule. Now the business is operating well – just in time for summer holidays where they have the potential to trade well, particularly in poor weather. They had a very low cash burn and a strong balance sheet, which steered them through COVID well. We are pleased that they are able to return to more normal operations now restrictions have been relaxed. They used the lockdowns to their advantage, taking the time to evaluate the estate and proposition, introducing menu changes and encouraging a shift to pre-booking online, all of which have been positive changes for the business.”
Gervais Williams, Co-Manager of The Diverse Income Trust, said: “Although the opening up of the economy has been somewhat patchy, with various pandemic challenges remaining, many UK companies that cut their dividends last year have reinstated them during the second quarter this year. The biggest exceptions to the improving trend have been the dividend income from many of the major energy stocks and some consumer businesses. Overall, the revenue per share of The Diverse Income Trust has greatly improved, and it has maintained an unbroken dividend record despite the pandemic, albeit that this has involved drawing on past revenue reserves to some degree.”
