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Cherry Reynolds: Hello and welcome to the latest in our Aberdeen Standard Investment Trust podcast series.

With me today are Bruce Stout and Martin Connaghan, managers of the Murray International Trust. We're going to be discussing where they're seeing opportunities today as the economic recovery begins in earnest, welcome everyone.

Bruce let's start with you. The last year has been unusual to say the least, let's talk a little bit about how the Trust has fared over the past 12 months.

Bruce Stout: Well, I think first of all you can say that nothing really prepares you for a year like last year because we've encountered things last year that we've never seen before, so I think to sum it up it was really a year to try and negotiate, to get through without losing any money and we did that just about. In terms of the net asset value, total return was roughly flat, and we did manage to increase the dividend ahead of the rate of inflation which is the investment objective of the Trust. And I guess the final thing was that through the adversity, we did manage to take advantage of many of the opportunities that presented themselves particularly earlier in the year when we switched a lot of bond money into Equities and enhanced the yield and dividend growth characteristics of the Trust.

Cherry: Great now Martin, there's been a notable change in market mood over the past few months. Could you talk a bit about how that's manifested in the portfolio and whether you've made any changes as a result?

Martin Connaghan: Yeah well, there's not been a change in Bruces’ or my own mood but there has been the yeah, the much commented on you know, rotation within the market, you know a little bit from growth, towards value since the end of October into November.

I mean how that's manifested itself in a portfolio and a geographic perspective, we've seen exposures to Latin America and emerging markets in Asia begin to you know perform quite well. I've seen exposures from the energy sector, from materials, industrials you know also begin to perform quite well. We’ve made changes in the portfolio during that time but not as a direct result of the rotation you know, we've reduced some of the airport exposure - for example we sold out a Auckland airport, we reduced AZURE Airport in Mexico at the margin, just because those stocks had rebounded quite well and there's still uncertainty around air travel. You know we've been adding to elements of consumer staples or utilities, pharmaceuticals as well which have been a little bit weaker. So you know, we've been taking advantage of the market environment but that's far more driven by opportunities that we're seeing at the stock level rather than us trying to play any theme that the market might be focusing on from one quarter to the next because the direction of travel is quite difficult to gauge as is the length of time that the market might be focusing on it.

Cherry: Okay great, thanks Martin and Bruce - how confident are you about the emerging economic recovery and does it really make any difference to your portfolio positioning?

Bruce: Yes, gauging the economic recovery is going to be very difficult I suspect, none of us have tried this path of recovery from a pandemic so I daresay there'll be quite a few pitfalls along the way. But what's of prime importance to ourselves is not so much the economic recovery but more the business prospects for the companies in which we invested and have in the portfolio. For some of those companies that suffered last year from lack of social mobility of people is a welcome relief that things will get back to normal, we'll start to see the businesses pick up again and a lot of them have done a very good job of protecting their assets during a tough period and it will be very interesting to see what operational leverage they have to recover as we go forward from here in some of the companies that we own.

Cherry: Okay and Martin, what other big themes would you highlight from the portfolio at the moment?

Martin: I guess the only thing that we would really only ever point to would be the one of diversification. You know we're just really always trying to buy, well-run, well-managed businesses, that they do, different things in different parts of the globe because you know last year that certainly helped with regards to securing the revenues that we need to generate for the Trust. And given the uncertainty going forward, we feel that that's probably the only theme that's ever really prevalent in the trust is one of being a globally diversified investment trust.

Cherry: And Bruce, dividends were obviously one of the casualties of the pandemic though less so for the kind of global markets in which you operate. But even with that in mind, are you seeing dividends come back and if so are there any patterns to where they've been strongest, you know, in terms of geography or sector?

Bruce: Well, dividends are absolutely key aren't they for an income trust and it's something that Martin and I have been obviously paying a lot of attention to. I think the key here is to be able to have geographical and business diversification and the last time we really had a full-blown dividend recession in the UK, you have to go back 20 years and it lasted for about five years and even if you take the dividend recession of 08/09 in the global financial crisis, it was quite concentrated in the banks, many of these banks are still not back to what they had before. So, I think the key to recovering dividends is to keep the diversification throughout the portfolio. If there is one trend that we kind of see is that the strongly financed companies particularly in Asia have been far less hit than some of the businesses in the more developed world, where we've seen dividends decimated particularly in the UK, I think the UK dividends were down over 40% last year, so it's all about diversification from here and strong balance sheets.

Cherry: Okay and Martin, you've talked about diversification just then but what does the geographic mix of the portfolio look like today? I mean clearly there are areas where it's easier to get dividends than others where dividends have been stronger, I noticed you've reduced your Japan weighting a little bit and increased your U.S waiting I think - can you talk us through what the, what the portfolio looks like today in those terms?

Martin: Yeah, certainly, I mean if you look at the sort of more recent additions to the Trust over the last you know 12 to 18 months, they have been from everywhere. We've put, you know, U.S tech companies in, we've put European insurance companies in, we've put Asian and Chinese focused real estate companies in, so the recent additions to the Trust have been from all over the globe as we would expect.

I mean in terms of the asset allocation and from the geographic perspective at the moment, you're quite right, we're actually now, since exiting Japan Tobacco, we actually have a zero weighting in Japan at the moment, just as a result of struggling to see companies that we're both happy with that have the sizable and growing and sustainable dividends that we like to see. Elements of the allocation that remain or have remained relatively stable, have been exposed to Latin America and Asia, those have remained where they have been for largely the last few years and yeah more recently the U.S weight has been creeping up, the North American weight is around 25% and if anything that's been, you know, funded from a sort of gradual reduction in the UK weight, the last few years the UK rate at the moment is around about 6%.

So in terms of activity, they've been from all over the globe and new stocks that we've been putting in, elements of stability within the asset allocation being you know Asia and Emerging Markets, but there has been a little bit of a shift from some developed markets in the UK and Japan to developed markets in North America.

Cherry: In 2020, there was marginally higher turnover on the Trust. Bruce, I wonder if you could just talk a bit about why that was?

Bruce: Yeah, this kind of follows on from what Martin was saying. A small part of that was due to necessity, where a couple of business models we owned I think they irrevocably changed because of the pandemic and we sold out a couple of banks, Bank of Pekao in Poland and Public Bank in Malaysia. But the vast majority of the increased turnover was because of opportunity, there's absolutely no doubt about that. And at times to be able to buy high quality, equities, good companies, diversified companies, trading with above six percent yields, double digit dividend growth over one, three and five year periods - it was an opportunity not to miss and we could finance it from particularly emerging market bonds and get yield pickup and dividend growth pick up so that was the main reason for the increase in the transaction activity.

Cherry: Okay thanks and Martin let's turn to the risk side now. I mean what do you consider the main risks in markets today and are you doing anything in the portfolio to kind of protect against those risks?

Martin: Where do you start - I mean it could be you know the risk of another pandemic, there could be a risk a tantrum within markets, if and when there's to be a movement on rates if you believe that, you know, inflation is going to be on the rise for longer. You've got special purpose acquisition companies, anything that labelled ESG ran quite hard last year, we've got heavily oversubscribed IPOs, you get geopolitical risk, you've got climate change - I mean you can come up with a million and one risks if, you know really, really put your mind to it, that could impact on capital markets.

The point I would stress is that if you ask us what our review for last year would have been at the beginning of last year in terms of what the largest risk would have been, we would have probably given you the wrong answer, so you know, what do we do? You know, we focus on the things that we can control - and that's quite simply stocks that we put into the trust, and the stocks that we don't. And in doing that we just ask ourselves, you know really, really, simple questions around the management team, and the business, and the financial strength of it , and the market in which operates, and the strength of cash flows, and the dividends and you know, I just really don't see that changing at all, and again that just brings us back to that session with diversification if you like.

Cherry: Bruce, the markets have obviously run up quite a long way but there's kind of been a lot going on under the surface. What would you say about valuations today? Are they, are they a mixed bag, are you seeing over valuations in some areas and under evaluation elsewhere - I mean what's your big picture?

Bruce: Well, I think Martin and myself, we're very much focused on what we can measure in terms of valuations because what we've seen over really the last five or ten years, is that when there is a scarcity of growth and there has been really during a period of uncertain policy in the world, then people are prepared to pay higher and higher multiples for growth and it's not something that we are prepared to do.

The other thing that we've noticed recently, people moving further and further up the balance sheet to try and justify ownership of businesses and using metrices such as price to sales or price to clicks or whatever and it's not something and that we can get a tangible hold on, but conversely in many of the businesses that were overlooked last year in the broader sense as the market focused on tech and e-businesses all over the place, those valuations look okay relative to what's achievable in terms of earnings and dividends and so that's where our focus you know continues to be as it's always been - we're looking to buy growth at a reasonable price.

Cherry: Great and then Martin, just a final question to you - do you have any sense of what will be you know the big themes for global investors over the next 12 months obviously nobody would have predicted the pandemic but do you think things like interest rates or inflation might dominate?

Martin: Yeah, I mean it would certainly be too, I think you know the market will probably first and foremost focus on the you know the unwind of lockdown and the opening up of economies and trying to speculate on who will be and then subsequently ultimately are the, you know, the winners and losers of that. ESG was a focus last year, elements of that suffered a bit more recently, so it'll be interesting to see what happens there. Growth versus value as we've mentioned, bond yields and yeah definitely then, you know, inflation feeding through too at some point, where and when on interest rates, would be just some of the things that market participants will probably be able to focus on in the next 12 months.

Cherry: Thank you Bruce, Martin for those insights today and to our listeners for tuning in you can find out more about the trust at www.murray-intl.co.uk and please do look out for future episodes.

This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation, or solicitation to deal in any of the investments or products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen Standard Investments. The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested. Past performance is not a guide to future returns. Return projections are estimates and provide no guarantee of future results.

Podcasts from Aberdeen Standard Investment Trusts - invest in good company.

Interviewer: Hello, and welcome to the latest in the Aberdeen Standard Investment Trust podcast series. On today's income panel, we have fund managers Bruce Stout, Yoojeong Oh and Iain Pyle to talk about how they've managed their income mandate this year, and the prospects for 2021. Welcome, everyone. Now, Bruce, we'll start with you. It's been a tough year for income seekers. I wondered if you could give us a global view on the dividend picture, which areas have been resilient and which have been weaker.

Bruce: Yeah, tough is one word to describe it. It is probably the hardest year, I think we've ever seen in terms of income in global financial markets. We were just having a look back and dividend recessions are actually not that common in history, there's probably been about half a dozen in the last hundred years. But when they're concentrated all around the world, like they have been in the last 12 months, they are very deep and very painful. What we saw in terms of resilience, I guess, was sectors such as telecommunications continued to be okay. Consumer staples on the whole were good and tech companies that pay dividends, the ones that we're interested in, things like Taiwan Semi, and Samsung and GlobalWafers have continued to pay good dividends. As did healthcare and I suppose one of the surprise areas of strength for dividends was in commodities, particularly things like copper and iron ore, and also lithium. But where dividends were weak, they were very weak. And we saw draconian cuts in banks, in energy companies, insurance. And the more sort of consumer discretionary industries such as airports, travel and tourism. The final thing I would probably say about the past year for dividends is it's really been an attack on all fronts, because we've had companies that have been leveraged, and they've had no cash and had to cut. Thankfully, we don't have exposure to those types of businesses. But we've also had some companies where they've had strong balance sheets and good cash, but they’ve still cut because of the uncertainty. And then the more difficult areas have been areas where regulators have demanded cuts in things like banks and insurance, which make up about 25% of global dividends in the past so that was tough. And politicians have weighed into the argument as well, demanding cuts in some partially state owned companies. So an absolute tsunami for dividends over the past 12 months in a tough environment to negotiate.

Interviewer: And what are you seeing now from companies as there's more visibility on earnings? Are you starting to see some dividends restored? And is that focused on certain sectors?

Bruce: Yes, it's quite interesting. I mean, we don't blame any companies for suspending or cancelling dividends last year because there was so much uncertainty, it was very difficult for them to get trading statements, it was very difficult to see what was happening. And of course, they wanted to maintain liquidity. And, and that was just the nature of the environment that we were in. But there's a bit more confidence coming back to some visibility and transparency in recovery, particularly in Asia and emerging areas that don't have the overhang perhaps that the developed world has. And we’ve seen a couple of specials actually recently, one in Indo Cement in Indonesia and Sociedad Quimica Y Minera in Chile, and we've had one or two companies that are talking about restoring the dividends in the first half of next year. So hopefully it will be a more positive outlook the next year when we start to see recovery take hold.

Interviewer: Okay and finally, do you have any views on the outlook for 2021? Any themes you have picked up for that?

Bruce: Yeah, I mean, apart from the general recovery in an environment where people might start to get back to normal, I think there are two aspects here that are very, very important for the future of dividends going forward. One is corporate balance sheets, and that the companies are strong enough to invest and to return more cash to shareholders, and there's absolutely no doubt on a global basis that leads us to Asia, because the debt to equity, in general in those areas is much, much lower than a place like the United States, for example, where companies have been aggressively borrowing in a low interest rate environment for the last five years. And debt to equity on the S&P 500 is up about 70%. So the affordability’s not there in the US and the will’s not there as well. But the other thing that's also very important is the shape of the yield curves in various countries going forward from here, because, again, in a place like Asia where a 10 year bond might be 4 or 5% in India and Indonesia, then an equity yield of 4 or 5% is perfectly normal. And those are the sort of levels that are very attractive. But in the developed world where 10 year bond yields are practically zero, then it will be very interesting in the next five years, to see at what level companies restore dividends, do they go back to the traditional 4 or 5%? Or will they be lower? And that's a question we can't answer at the moment. But it will be very important for the future level of dividends going forward.

Interviewer: Okay, great. Thank you, Bruce. Yoojeong, what's been the picture on dividends in Asia?

Yoojeong: Yeah, so I can just pick up on some of the points that Bruce has just made. As one of the fastest growing areas of the world, Asia really entered the crisis with a lower base as far as dividend yields were concerned. And so dividend cuts within the region have been more modest relative to more developed regions. And of course, Asia has sold down too in March and April. And we've also seen lockdowns and travel restrictions here as well, which hurt the tourism related businesses in particular. However, the recovery in markets since then has been very strong, earnings growth, and hence dividend growth, for the region is driven by consumption. And that hasn't gone away. So favourable demographics, and the rising middle income story remains very much intact.

Interviewer: And what steps have you been taking to kind of navigate this environment, sort of steer the portfolio to the winners and avoid those that are cutting?

Yoojeong: When the pandemic hit, I didn't think there was much time to try and reposition the portfolio. But fortunately, less than 5% of the Asian Income Fund was invested at the time in companies who ended up suspending their dividend. And these were, as Bruce mentioned, those that were mandated by the regulator rather than a result of financial distress. Turnover in the fund remained low during the year. So we're still looking below 20%. And the reason we were able to avoid the bulk of dividend cancellation is due to our investment process, which focuses on good quality companies that have strong business franchises, and cash flow generation along with robust balance sheets. We spend quite a fair bit of time looking at ESG factors as well, and how resilient these frameworks are, which often tie into prudence and that culture of respecting total returns for minority shareholders as well. So dividend growth on an absolute basis is lower this year, as expected given the disruption seen to earnings growth over the summer months in particular, but actually, earnings recovery in Asia has been quick. The Asian Income Fund has enjoyed some dividend increases this year as well, as well as special dividends and cash returns from the companies that we invest in.

Interviewer: Okay, and where are you finding those sources of resilient income? I mean, are they across multiple sectors? Or do they tend to be in certain areas?

Yoojeong: Yeah, so we're looking for resilient income and income growth. And again, as Bruce touched upon at the beginning, Asia is really home to the global leaders in technology, and that's been a huge beneficiary of the working from home trade that we've seen this year. So whilst we don't invest in the internet stocks that don't pay dividends, we've banked some pretty strong share price gains from the semiconductor manufacturers TSMC in Taiwan, and Samsung Electronics in Korea to sit on cash balance sheets and they pay good dividends. And they’re looking at a strong cyclical recovery as we head into 2021 as well. So these two stocks are our largest positions within the fund. But we also invest selectively in the supply chain as well, where we see dominant market share and dividend growth. So an example there would be the mid cap company GlobalWafers in Taiwan, who make the silicon wafers that are the raw material for both Samsung Electronics and TSMC. And, as mentioned earlier there, consumption remains well supported in Asia. And we've benefited from dividend growth this year from a more diverse range of sectors than just technology. So we've seen special dividends from convenience store operators in Hong Kong, to e-commerce companies in Taiwan. And we've been invested very broadly across petrol station REITs in Australia, to equipment suppliers for COVID testing kits in Singapore. So there's been a lot of positive dividend news over the year as well from a wide range of sectors. And we're able to collect income from this broad range of sectors and markets, which has been particularly important during these volatile times such as the one we’ve all lived through this year.

Interviewer: Great. Okay. Thank you, Yoojeong. Coming to you Iain, now the UK has definitely been one of the toughest areas this year. I wonder if you could talk a bit about how you've navigated this environment?

Iain: Yeah, of course. So with the UK being a fairly income focused market compared to Asia, I think it's felt dividend cuts this year, more than many other places. And I think dividends for the for the market are down about 45%, which is obviously a pretty significant cut. In terms of how we've navigated it in Shires, I think we came into the cuts in a reasonably good position, the weighting towards higher quality companies, and a strong position in preference shares where dividends have been absolutely rock solid has definitely been helpful. And it means we've had less exposure to the sectors that Bruce mentioned where you've seen the bulk of the cuts, but clearly along with any income portfolio in the UK, they haven't been immune from dividend cuts this year. And in terms of managing through those, we've tried to bucket the dividend cutters in three sectors. So first of all, you've got the ones where balance sheet is okay, cash generation still okay, but there's a regulatory requirement to suspend dividends. And that's primarily the banks in the UK, so in our portfolio, things like Standard Chartered and Close Brothers. And in both those cases, actually, cash generation has remained strong, capital positions remain in a pretty good place. And we're confident that when dividend bans are lifted, hopefully early next year, we'll see dividends resume. So it's fairly easy to sit and hold on to those first kind of companies. The second bucket is the companies where you've got a really sharp, short and hopefully temporary shortfall in cash generation, and they can be things that are consumer facing, something like Howden Joinery selling kitchens in the UK is a good example, where no one is buying a kitchen in the second quarter of this year. There's no cash generation, the right decision is to suspend dividends, but when the market normalises we'd expect cash generation to come back, the balance sheet is in a good situation and dividends will resume and in fact, Howdens is one which has resumed paying dividends already. And again, where we like the companies where they're high quality names, we're going to hold on to those positions and be a bit patient. And the third bucket is a difficult one – it’s where actually, even when the world normalises next year hopefully, there will be some structural change and where balance sheets have deteriorated to such an extent that we don't see income coming back from those companies within an investable timeframe. And we had very few of those in the portfolio but Cineworld is probably an example where that industry may well structurally change. And from an income perspective, it's time to move on. So we've managed, we've managed through it that way. But I think the nice thing is that income within Shires has been down substantially less than the market. So we've come into it in a good position and that has paid dividends.

Interviewer: Alright. And you’ve seen some of the biggest UK dividend payers cut. Is there a sense that the pandemic could reshape the dividend landscape in the UK, moving away from some of those old economy companies that have dominated in previous years?

Iain: I think there is certainly going to be a little bit of a shuffling of the pack. If you think about the big income constituents of the index historically, then actually a lot of those names have been very resilient. So, utilities, health care, tobacco, telecoms and even the miners actually have all been very resilient through this year. The two areas where we've seen dividend cuts have been the banks and the oil companies. And the banks, I think is, a temporary thing, it will come back probably at a slightly lower level than it was pre crisis. The oil companies is a more of a structural thing, I think that they transition through an energy change over the next few decades. And if you look at the top dividend payers this time last year, then the top five, or the top three, were HSBC, Royal Dutch Shell and BP and they have now all slipped out of the top five. So that's obviously quite a big shift in the makeup of income within the UK market.

Interviewer: Okay, and a question to everyone now, about the extent to which you've had to draw on reserves to shore up dividend payments to shareholders this year, and the impact that's had on reserves going forward. Bruce, could I put that to you first?

Bruce: Yeah, so obviously, the very attractive aspect of the investment trust as a business is that the trust has reserves in order to cover this and Murray International has a lot of reserves, I can't give you the exact number for the simple reason that I don't know it yet. The year end is the end of December. But the board have already committed to maintaining the dividend, you know, through this difficult year. And over the last 5 years, or 10 years, or whatever we've constantly been adding to the services and in fact have added 30 million in the last 10 years. So that’s what the reserves are there for - they’re there for a rainy day. And this has been an absolute downpour this year. So hopefully, you know, next year, we'll get back into a more stable situation. And we'll just use whatever reserves we have to use this year to through it.

Interviewer: Okay, and Yoojoeng, same question to you.

Yoojeong: Yep, very similar for Asian Income. We started 2020 with close to two thirds of dividends covered by reserves, so a very healthy safety buffer that we’ve built up over the years. For the past 12 years, the Asian Income Fund has grown the dividend per share paid to shareholders. And we would also very much like to maintain this trend, even during this downpour that Bruce alludes to. So this will mean we will dip into reserves for the first time this year, but it will still only be very modest, given some of the dividend trends I spoke about earlier. And the majority of the reserves will remain untouched for future rainy days.

Interviewer: Great. And finally you Iain?

Iain: Yeah, very much the same again for Shires - we came into this year with around one year of dividends covered by reserves. And this year, clearly, we're going to have to draw down on that slightly. But actually, it'll be at a pretty low level and going forwards I think we – we’ve got an outlook which will hopefully allow us to build back towards coverage within the next few years. So the drawing should be relatively modest.

Interviewer: Great. And then just finally, Iain, I'll come to you first on this. If you had sort of one or two things that an income seekers should really bear in mind for the year ahead, what would they be?

Iain: I think, have a little bit of patience on income. As Bruce alluded to earlier, a lot of companies are going to come out of this year with a balance sheet slightly more stretched. And we're probably going to go into a restocking cycle, which is going to have a draw on cash through next year. And therefore it might take a little bit of time for companies to restart dividends and to get dividends back up to prior levels. So we'll need to be patient. That doesn't mean those aren't very good investments and will still generate a good level of income. But we're not going to snap back to 2019 level straight away. And also, I think be aware of a bit of a change of mix of how we earn income going forwards, in that the sources of income will be different as we've already discussed. And we'll probably see a shift away from high levels of ordinary dividends to more something more flexible going forwards because companies will not want to put themselves in a position where they need to cut anytime in the near term. So those things we need to think about as investors but hopefully with dividends, we're going to be in a period where we can see some decent dividend growth over the next few years and that's actually when income as a style performs better.

Interviewer: Okay, great. Yoojeong, would you add anything to that?

Yoojeong: Yeah, so there's a lot of macro stories coming out that people are focusing on. We're talking about vaccines, we're talking about all this - all these stimulus measures globally unwinding and also the risk of inflation as we talk about trade frictions, particularly impacting regions of Asia, with supply chains having to reorganise as a result of that, so these are all things that markets are worried about. And we are worried about too, as well. But in the context of that, in the context of the macro noise, I think what we have consistently done over the past 10 plus years is really stick to what we do. And that's to continue to invest in good quality companies that are generating strong cash flows, who can support good dividend yield, as well as dividend growth. And that will hopefully enable us to continue delivering a good total return package to shareholders in Asian Income.

Interviewer: Great, thank you. And a final word from you, Bruce, if I could on that.

Bruce: Yeah, I guess – one thing that we've learned over the years is that when you have concentrated sources of income, you’re always very vulnerable. So it's something that at Murray International we've tried to avoid for a long time and, and the world has changed to the point where there are many more companies and markets that have embraced total return to shareholder and do pay higher and growing dividends, perhaps the US is the one anomaly there. So we will continue to focus on diversification because diversification is key in terms of countries and sectors, and different types of businesses, so that you have a spread of income sources throughout the portfolio. And it's not just dependent on one sector or one industry where if something happens, then you get into difficulty. So diversification for us continues to be key. Not by yield, but by good balance sheets so our dividends can grow.

Interviewer: Great. Okay. Thank you everyone for those insights today and to our listeners for tuning in. You can find out more about the Aberdeen trusts at www.invtrusts.co.uk and please do look out for future podcasts.

This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation, or solicitation to deal in any of the investments or products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen Standard Investments. The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested. Past performance is not a guide to future returns. Return projections are estimates and provide no guarantee of future results.

Podcasts from Aberdeen Standard Investment Trusts - invest in good company.

Interviewer: Hello. Welcome to the latest in the Aberdeen Standard Investment Trusts podcast series that we have for our panel today, our economist Luke Bartholomew will be giving his thoughts on the extraordinary 12 months we've just witnessed, while fund managers, Ben Ritchie, Bruce Stout and James Thom will be doing some crystal ball gazing on what we can expect in 2021. Welcome everybody. And now, Luke, turning to you first, nobody needs reminding that it's been a very unusual year. And I wonder if you can talk us through some of the highlights and low lights?

Luke: Sure. I think you're right, that it's been what to say at the very least unusual year. It's one of those years where all the cliches that we use often in this industry, extraordinary historical unprecedented for one. Absolutely true and on the nose. And in that context, I don't think it is too difficult to think of some lowlights; the absolutely astonishing collapse in economic activity that we saw in the first half of the year 25% or so contraction. In the UK, for example, one has to go back hundreds of years of economic history to find something comparable. And of course, you know, that economic costs really significantly understates the true welfare costs ,not just the public health consequences, and the tragic loss of life, but also the shutting down of opportunities for so many people. The fact that people weren't able to go out and live their normal lives, the huge increase in unemployment that we saw in the US less so in the UK, and the rest of Europe as different policies were put in place. But yeah, I think the economic costs were just absolutely astronomical. And really, as I say, I mean, truly are cliche inducing. So I mean, I think there are some positives, and if not positive, then at least things to give one some hope. First of all, how well policymakers came together in late March, early April, when it looked like not only were we facing a public health crisis, but also perhaps the financial market crisis, monetary and fiscal policymakers were able to largely avert that. And on the whole they have put in place policies that have supported cash flow and income through this extraordinary business. Now, no doubt there will be some long term consequences from that, but they have certainly diminished some of the short term costs that we might have faced. And then the most obvious highlight, I suppose, is the good news that we've had on the vaccine evidence, that if enough capital and human engineering, it is deployed in one direction, and we are capable of quite extraordinary things. And it looks like as we speak today, that there is light at the end of the tunnel as it comes to the vaccine. And I think perhaps that does speak positively, for our ability to solve user problems as well.

Interviewer: And with potential normality ahead, do you still think that the pandemic will permanently change some aspects of the global economy?

Luke: Yes, I are expecting the economy to end up being permanently smaller than it otherwise would have been. So there is some permanent loss of economic activity. And I don't think that's too difficult to understand in terms of the psychological scarring, which leads to reduced savings, reduced investment in various bits of sort of stranded capital that have come out from this crisis that are no longer quite as economically viable as though as they once were, the fact that a whole bunch of investment streams are probably not going to go ahead over the last year in a way that they otherwise would have done weighing on future growth. The scarring to the labor market that we might see from the periods of unemployment and inactivity. But beyond that, I think it's also possible to see other structural changes as well. It's hard to believe that we would have gone through this, and it won't have changes in some fundamental ways. The most obvious, I guess, is working from home, I suspect we'll be doing a fair bit more of that in the future. Perhaps our travel patterns will change, perhaps where we live and why we live in those places. Those will also change as well, particularly if we do end up working from home much more. And I guess the great imponderable from all of this is to what extent the capacity that we’ve shown to make great sacrifices when necessary , to have extraordinary innovation for the state to mobilise resources, whether that speaks to our capacity to deal with problems, like climate change, and what it might mean about how we go about tackling that in the future.

Interviewer: Yeah, and what about a final verdict on the health of the global economy today? Are you reasonably optimistic looking into 2021?

Luke: So I think right now, the way we frame it is, second wave versus the vaccine for the short term outlook is once again, looking pretty dark. I think the UK and Europe are only now only going to avoid a technical recession of two quarters of negative growth, it looks like key for this year is going to be a quite large contraction. And then next year, we're only expecting a very modest growth. But after that, I think for the second half of next year, we could find ourselves growing quite robustly. One of the things that we learned this summer is that when lockdown restrictions are lifted, in the short term, you get a pretty large boost from growth. And as lockdown measures get wound down in the second half of next year, the vaccine allows us to return to some kind of quote, unquote, normality, that is a period where we could see quite rapid growth and potentially a return to something like the old normal, but I suppose one final cautionary thought to end on is let's remember what that normal is that we're going back to it was already a world of pretty disappointing, sluggish growth, a world of quite low inflation with central bankers and other policymakers struggling to get the targets consistent inflation, and a world of very, very low interest rates. And to the extent to which we are going back to, quote unquote, normal. I think that is the normal we are going back to.

Interviewer: Okay, that's great. Thank you, Luke. If we could turn to you now, Bruce, and ask the same question. How optimistic Are you looking out over the next 12 months?

Bruce: Well it's always difficult to predict, isn't it? and optimism is not something I think that familiar to the average Scottish psyche. So I'll try and be realistic rather than optimistic with what we've got in front of us. And, I mean, undoubtedly, this has been an extraordinary period. I can't remember one in living memory, who has life and livelihoods and health and wealth, were all threatened at the same time. I suspects as we've heard before, that, for many nations and individuals, life will be a bit awkward, and we have changed, I guess. And for investors, that means an unfamiliar landscape, I suppose relative to the past, which may ultimately unfold. However, I think, as always, it be very presumptuous to extrapolate the events and investment teams of this year, because it was so unusual, as some sort of new normal because for many the new normal, is less about choice, just simply a reality. So I think as the world returns to something like it was before, then, I suppose we are quite optimistic, because we've seen such a gulf between a narrow number of stocks and themes that have performed this year, and particularly in e-commerce and technology. But on the other side of that, people totally ignoring things like oil and gas and commodities, and transport, tourism, etc. As if we're never going to need those again, really all sorts of cyclical assets and you can add to that Emerging markets and Asia as well. So there's a huge still a huge valuation gap between a small number of businesses that have done well and a large number of good quality companies that have lagged, and that valuation gap looks quite interesting for next year.

Interviewer: And so while the pandemic has reshaped the prospect for individual industries, you think that might have been overdone, a bit, that actually it is not it's not going to be as profound a change as markets have, have presumed?

Bruce: Yes I mean, we've gone and been very, very active this year. And looking at all the businesses that we own. When I see all the businesses, it's a concentrated portfolio, Murray International is only 50 companies, but we wanted to look at them, again, with a sort of fresh pair of eyes in light of what's been happening to see if things have really changed, because, I mean, there's a lot of talk about spare capacity out there. But a lot of the spare capacity may be obsolete capacity. Now, we don't know in which case, and some companies that do have good production services may be in a very advantageous position to raise prices and rebuild the balance sheets to ensure for, for some businesses like long haul travel, and the impact that it has on jet engines, or high street retailing, maybe the whole cash versus cashless society has changed. But for a lot of other businesses, they will go back to some semblance of normality, because they add essential services and commodities for people in their lives. So it's towards those types of growth companies that we're looking at the moment because I think that's where the best opportunities are, particularly we see in Asia and emerging markets, because if there's one thing that that looks as if it's going to evolve from this, there's going to be a legacy of huge public sector debt, particularly in the developed world. And that has to be paid off over a long period of time, which will have implications for taxation on both the individual level and the corporate level, and just a general constraint on growth. Whereas, particularly in Asia, in the developing world, we don't have the same fiscal imbalances, there's much more flexibility to still have fiscal policy. And there will be such a legacy as far as we can see. So that is a change, but it's a positive change for those areas.

Interviewer: And you mentioned a couple there, but I wonder if you could just talk a bit about the key themes running through the portfolio as we move next year?

Bruce: There are one or two key themes. I think the issue that that we've had this year is a real concentration of markets, particularly in technology and e-commerce. And, as markets have got narrower and narrower, there has been less focus on diversification and that that is one of the themes of Murray International we have over 25 different countries and about 60 different businesses. So it is a very diversified International Trust, that gives us a broad exposure for capital growth and for income growth. But also, the other main theme is that we are mainly focused on Asia and the Emerging Markets world with over 50% of the portfolio in Asia and the Emerging Markets world because that's where we feel going forward the best relative growth opportunities are. So the next five to 10 years at least, plus also remember that there will be a big legacy from the pandemic this year in terms of huge public sector debt that's been racked up in the developed world. And it has to be paid for, I guess, in higher taxes, both for individuals and for corporations at some point. So there is a drag for growth prospects in the developed world that just isn't there in Asia and emerging markets to the same extent. So that tailwind should be beneficial as well, as we go forward.

Interviewer: Great. Okay. Thank you, Bruce. And, James, coming to you, though, as Bruce mentioned, that Asia appear to have emerged stronger from the pandemic. I wonder if you could give your verdict on Asia's response and the economic recovery, you've seen since?

James: Yes, I'd largely agree with Bruce, although it does feel a little premature, perhaps delivering a verdict at this stage, because it's still, you know, we're still very much in the midst of the pandemic, and, and working our way through it. But having said that, I think, absolutely, Asia has done in general a commendable job, I think in the way in which they responded to the pandemic and managed their way through it. So much so now that we have several countries out here that will post positive GDP growth this year. So despite the very large hit to GDP in the first quarter, and first half of the year, given the their ability to contain the virus, we're now seeing economic activity recover quite quickly. And in particular, in China, the big economy here, but also Taiwan, Vietnam, I think are all due to deliver positive growth this year, which is quite a stark contrast to much of the rest of the world, and I think is a testament to the really very rapid and focused response that these countries had to containing the pandemic, locking down the borders, implementing an effective track and trace capability and obviously supporting economies with the stimulus when needed. So I think, overall, it is looking certainly relative to the rest of the world, pretty encouraging. Here, obviously, there remains the risk of second or even third wave. And we are continuing to see that and it's by no means a panacea. There are several countries here that are still battling through that that's the first wave, India stands out in particular, as a country that has seen very significant numbers of cases. But even there, fortunately, we're now seeing case numbers peak, and hopefully, it will continue to trend down those play that kind of second wave risk does remain.

Interviewer: Okay, and how are you positioning the Aberdeen New Dawn Investment Trust for the year ahead?

James: Well, the focus as ever remains on quality companies. So whilst growth is recovering, it is still pretty turbulent and an uncertain environment out there. So it feels prudent still to be invested in market leading companies with strong balance sheets and experienced management teams. So that's very much the focus overall. Having said that, we continue to think about the structural kind of growth themes and stories out here. And despite all the doom and gloom, I think there remain many of these kind of structural growth trends here in in Asia as Bruce was alluding to. So you have continued rising wealth levels and urbanisation and all of that is thriving demands, basic products and services, as it has for decades already. And I think that will continue but there are a lot of other kind of newer, faster moving trends, where Asia is playing a kind of key role. So the tech sector is one and we've got in Aberdeen New Dawn a substantial waiting. They're both in the kind of hardware side of the sector. So semiconductors, for example, where we're seeing multiple new drivers emerging for demand there, whether it's continued demand for high powered computing, data centres, cloud services, 5G, artificial intelligence, I mean, it really is a whole range of new drivers there. So I think that remains an attractive long term story. We're continuing to see substantial innovation in the internet sector. And with many of the Asian companies leading the way there, I think there's plenty going on there and COVID, as it has for much of the rest of the world has been a catalyst for that sector. We continue to see that transition from offline to online. But then I think also, you know, in the green economy, there's plenty going on here in Asia, whether it's the shift to electric vehicles, or to renewable energy. And many of the countries here are coming up with quite ambitious targets. So I think that's providing interesting investment opportunities for a slightly longer term investment horizon.

Interviewer: And what extent would you say that the pandemic has fundamentally reshaped the outlook for Asian companies? Or do you believe like Bruce that this has gone too far, at times that people have been assuming a new normal? And perhaps it's not going to be that different after all?

James: Yes, it's so difficult really to have a clear view, at this point in time, in my personal opinion on working from home, my feeling is that we shouldn't yet be writing the obituary of office space and commercial real estate just yet. And I suspect tourism and travel will eventually rebound, though, admittedly, it may not get back to pre-COVID levels. But I think, that aside, certainly there are changes happening, as a consequence of this we have talked about the internet companies already and that has been a catalyst to moving consumption online. I think that that's very real and is permanent. We've got a number of IT services companies in that part of the world, and they're seeing their corporate clients, increasing their efforts to digitise processes and shift things to the cloud. And companies themselves, I think, are increasingly doing this, you know, we see it across the region, in an effort to, I guess, they've been forced to go to digital ways of working, but have found in many cases, that's a relatively effective way of working and cost efficient, were working. So it's been quite big cost reductions happening as a consequence of this. So I think there are, you know, a number of changes that, arguably could be positive for Asian companies. And we'll have to see how permanent those proved to be. But I think many of them will be structural.

Interviewer: Great. Okay. Thank you, James. Ben, let's turn to you now The Dunedin Income Growth Investment Trust invests across both the UK and Europe, perhaps Europe, can you see a better year ahead the stock markets in the region? And if so, you know, any particular hotspots, either regionally or sectorally?

Ben: Given everything that's happened in 2020, looking at the pan European index it is actually not too bad to be down mid single digit percentage. I think, given everything that's happened is a reasonable results. The UK has been a little bit weaker than that, overall. But I think given the ginormous economic impact that we saw earlier in the year from COVID, I think to have ended up with that outcome is reasonably okay. I think looking into next year, as Luke was sort of painting the picture, really, there's a combination of sort of near term economic weakness, which is likely to feed into some pressure on companies. But then you've got a combination of expected rebound, as we move into the second half of the year, perhaps into the second quarter. And then you've got the the rollout of of the vaccines, which I guess should support further growth. And I think that's the sort of environment where we would probably expect that investors will look through the near term weakness and look out to perhaps the more optimistic picture for economic growth, and certainly when you look at what consensus is expecting from an earnings perspective, then, you are probably looking for somewhere between 35 and 45% earnings growth next year, you know, that's probably likely to be supportive for the outlook for equities as well. Although, when you think about this year, we saw that 38% decline in Europe, and a bit more in the UK. And markets have not taken that too terribly overall. So we'll have to see that imbalance. But I think certainly, next year, looks like it might be a little bit better. But I think following on from what Bruce was saying, it's always hard to say how these things will develop really at the market level.

Interviewer: And I mean, the region has had valuations on it’s side. Is that still the case, are the valuations still pretty competitive compared with its global peers?

Ben: Yeah, I mean, I think they are. But I would always caution against reading too much into that. I mean, I think, you know, Europe as a market has been cheap for most of the last 20 years. So I'm not sure that's the new thing. And it's also generally been a bit of a disappointing place for investors at a global level, you know, the UK has been on a fairly significant discount to most other markets since Brexit, and again, that hasn't necessarily helped its performance. So I think it'll really comes back down to what we think companies can deliver, in terms of earnings and cash growth. And also the starting prices which we're paying for those businesses, so we still see plenty of opportunities at the company level across Europe and the UK. But we wouldn't be making a big play of the fact that the overall markets and necessarily cheaper than other ones in the world, because I also think when you actually look at details, there is some reasonable reasons why the UK might be cheaper, they have nothing to do with Brexit, but have a lot to do with big chunks of the index being in sectors, which traditionally always have relatively low valuation like banks or oil companies or mining, when you look at them on a PE basis. So you know, I think, optimistic at the company level, but we would be cautious a little bit on using valuation as the primary reason to be enthusiastic about those markets.

Interviewer: Okay, and how are you positioning the Dunedin Income Growth Trust for the year ahead?

Ben: So see, one of the things we've really focused on over the last couple of years is not putting all of our eggs in one particular outcome basket. So to go back to 2019, one of the things that we did there, as we approached the deadlines around Brexit deals, was not really having any great insight into how that would play out was just to make sure that we were quite balanced in terms of our positioning, to make sure that we had good domestic UK exposure, which is prosper in the case of a deal, but also have some good overseas companies, which continue to generate good returns, if we were to see a reasonable outcome. And I think we've tried to take that kind of approach where if we don't know, then why take in a big bets, either way. And I think that's much the same, really, as we look out into 2021. And we look at that, for the last few weeks, we've had the US presidential elections, we've had the development of vaccines, through both of those quite big events we managed to keep relative pace with what's been going on in the market, despite having proven to be pretty resilient for most of this year. So we see that as a sort of some degree of a good outturn in terms of positioning. And I think if we look into the year ahead, we want to be both resilient in tough market conditions, if we do see sentiment turned down for whatever reason, or the economy, not deliver what people expect. But equally, you know, we want to be able to participate in any available growth opportunities that might be there. So, you know, perhaps the segment where we might lag the most would be if we really do see the very, very distressed companies in the market perform incredibly strongly in 2021, that probably won't be particularly helpful for us. But otherwise, I think we feel pretty good about our outlook. And we put an interesting portfolio with a range of different companies operating in different economies, different geographies, different economic drivers. And I think that overall leaves us feeling quite confident that we're well positioned with a good bunch of companies, you know, almost regardless of what comes out of some sort of macro-economic or strategic political perspective.

Interviewer: Great. Okay. Thank you, Ben. And thank you everyone for those insights today. And thank you to our listeners for tuning in. And let's hope for a less eventful 2021. You can find out more about the full range of Aberdeen Standard Investment Trusts www.invtrusts.co.uk and please do look out for future podcasts.

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This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments of products mentioned herein, and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen Standard Investments. The value of investments and the income from them can go down as well as up, and investors make it back less than the amount invested. Past performance is not a guide to future returns, return projections are estimates and provide no guarantee of future results.