A third national lockdown to deal with a new strain of Covid-19 has not dampened the tailwinds of a Brexit trade deal and vaccines for UK equities for UK investment trust managers.
With investors finally getting the long-awaited UK-EU trade deal on Christmas Eve, much of the uncertainty about the post-Brexit relationship has been removed.
Nevertheless, the UK continues to deal with the impact of Covid-19 and the emergence of a more virulent strain which has forced it into a third national lockdown.
As such, the Association of Investment Companies (AIC) asked the managers of several UK-focused investment trusts which sectors and stocks they believe will be the winners and losers in the current environment.
Guy Anderson, The Mercantile Investment Trust
The Mercantile Investment Trust’s Guy Anderson said while companies have had several years to prepare for various outcomes, the trade deal allowed the continuation of tariff and quota-free trade in goods between the UK and EU, which “will be welcomed by many”.
He said companies that source goods or material inputs from the EU should benefit from low-friction trade and a strong sterling.
Nevertheless, there were some Brexit challenges highlighted by the manager.
“Although the trade deal ensures tariff-free trade in goods for the foreseeable future, an end to freedom of movement could impact labour availability in some sectors that employed large numbers of EU citizens,” he said. “This could include retail and food production, for example.”
Regarding Covid-19, Anderson said the holdings in The Mercantile Investment Trust are well-positioned for the third national lockdown, highlighting ‘stay-at-home-winners’ like Pets at Home and discount store B&M.
“Given lessons from previous lockdowns, most companies are now familiar with the necessary operational protocols and, in many cases, better positioned,” he said.
Abbie Glennie, Standard Life UK Smaller Companies Trust
“Further lockdowns are disappointing and a drain on the UK economy,” said Abbie Glennie, investment director of Standard Life UK Smaller Companies Trust.
“Some sectors such as construction are less impacted than previously, and for some companies lockdowns may even be helpful. We think the disparity between winners and losers in certain sectors will continue to accelerate.”
On the Brexit deal, Glennie was increasingly optimistic about the prospects for the economy.
“It may be a catalyst to encourage asset flows into UK equities, with many investors having been standing on the sidelines,” she said.
David Smith, Henderson High Income Trust
“Equity markets hate uncertainty and there has been a lot to worry about over the last few years,” said David Smith, manager of the Henderson High Income Trust, said highlighting not just Brexit, but the pandemic and US-China trade relations.
“This year there is less uncertainty and with effective vaccines being rolled out there is a credible path to life returning to some form of normality sooner rather than later,” he said. 
With less uncertainty and continuing fiscal and monetary support, Smith (pictured) is optimistic about the outlook for UK equities.
“The biggest fear was the potential disruption caused by a no-deal Brexit,” he said. “As the worst of that disruption has been avoided, although I would still expect an increase in friction of trade moving between the UK and Europe.
“The backdrop is positive especially given that the starting valuation is attractive both in absolute terms and relative to other developed markets.”
One company that Smith said is better prepared for this lockdown than the previous two was publisher Informa.
“Informa, a professional publisher and events business, raised equity, cut costs and refinanced their debt so that even if the company couldn’t run physical events outside of China in 2021, they would still be able to generate positive cash flow from the rest of the business,” he said. “This puts the company in a good position to not only survive in the short term but thrive in the longer term given there is a credible path to recovery now there are effective vaccines.”
Margaret Lawson, SVM UK Emerging Fund
“It’s too soon to tell if the trade deal will materially help trading in our portfolio companies,” noted Margaret Lawson, lead manager of the SVM UK Emerging fund. “The last four years have seen international investors reduce UK exposure and many UK wealth managers also rebalance to be more global resulting in UK equities lagging other main markets.”
This, she explained, represents a clear opportunity to catch up.
Many of the fund’s portfolio companies are focused on enterprise services using cloud support or e-commerce, while others are helped by sustainability trends.
“I expect investment in supporting business resilience and strengthening supply chains to continue,” said Lawson. “The UK economic recovery is likely to be led by government encouragement for sustainability and environmental improvement.”
She explained that some government stimulus will continue and there is a need for many companies to replenish inventory and make further capital investment.
Consumers too, who have been able to continue working will have higher levels of savings.
“I believe this will trigger pent-up consumer demand for travel and hospitality and a sharp recovery,” said Lawson. “Corporate buyers may be the first to spot the value in UK listed companies.”
Alex Wright, Fidelity Special Values
“My views remain unchanged post the Brexit deal,” said Alex Wright, manager of the Fidelity Special Values fund. “The UK stock market and particularly UK domestic-facing stocks look very attractively priced, with many having strong fundamentals.” 
He said the virus will probably start to abate by Easter or summer in the developed world and is therefore making few changes to the portfolio – just adding to some domestic and virus-exposed names at the margin.
“I believe both the Brexit deal and Covid vaccines wil]l quickly increase the interest in UK equities from domestic and foreign investors and from corporates, as we are already seeing with increased M&A [merger & acquisition activity in the UK market,” said Wright (pictured).
“Now these two key uncertainties have passed, the incredible value in UK equities cannot be ignored much longer.”