Abrdn’s analysis shows that stocks in small UK businesses are the “most unloved” in the world. This is because investors have refused to hold the UK and are investing in US tech giants.
According to Asset Manager, MSCI’s UK Small Cap Stock Index’s futures price/return ratio was 24.3% below the 10-year average at the end of January and 24.3% below the 10-year average at the end of January.
Investors have used a positive price/revenue ratio (compared to expected profit) that compares the value of a company as a yardstick against historically expensive stocks or other stocks.
The findings come when Prime Minister Rachel Reeves appears to boost retail and institutional investment in the UK after a period of sustained outflows from domestic stocks.
“These discounts reflect the negative feelings we’ve seen recently about small businesses in the UK,” said Abby Glennie, co-manager of Abrdn’s UK Small Business Fund. She added that it was “a tough time for the sector,” but that “many great small businesses in the UK have a much larger rival to global performance in terms of revenue growth.”
While investment in small businesses can be volatile, Glenny said, “For those who want a long-term view, the current scale of discounts can provide attractive opportunities.”
Abrdn compares the P/E ratios of MSCI indexes across major global stock markets, finding that UK small caps are the cheapest by historical standards, followed by European small caps, followed by P/E ratios before falling 19.8% below the 10-year average.
Around the world, small and medium-sized businesses’ 12-month forward P/E ratios were 3.2% below the 10-year average, while large companies were 20% above the historic average.
“When I think about the period coming out of Covid, when I saw interest rates rise and inflation rise, the market really changed in terms of risk attitudes,” Glenny said. “People just didn’t want to own assets, they saw the small cap as the bottom of the deal.”
MSCI’s small cap index accounts for approximately 14% of the countries’ free float adjusted market capitalization.
Darius McDermott, managing director of Chelsea Financial Services, said that when purchasing a small UK cap, you can “absolutely see the opportunity.” “Everyone has sold it since Brexit,” he said, explaining that domestically oriented small businesses in the UK were suffering from leaks more than their large peers responsible for business abroad.
“The funds we advise are overweight in small and medium-sized businesses in the UK,” McDermott said. The sector “have more capital allocation than before,” he said.
Over the past few years, global stock market earnings have been dominated by “magnificent seven” US tech stocks, with value gains last year, bringing the S&P 500 index of large US stocks to an all-time high.
According to an analysis by Abrdn, large US caps were trading at a premium of 29% against the 10-year average, based on the forward P/E ratio at the end of January.
The small caps in China were the most expensive compared to the historical level. Their decline in profits was because they pushed down investors’ expectations for future earnings and increased the forward P/E ratio.
Over the five years ended January 31, 2025, the MSCI UK Small Cap Index’s total annual return rate was 1.26% compared to 9.53% for MSCI World Small Cap. In contrast, the S&P 500 had a 15.2% annual total return over the same period.
Jason Hollands, managing director of investment platform BestInvest, said the growing prospects for a trade contract between the US and the UK should be “considered as encouragement news that could help restore British stock optimism.”
He added: “The UK is not our top pick market right now, but it doesn’t deserve to be completely ignored.” This states that the “Boying Old FTSE 100” is up 6%, while the epic seven stocks are down 3%.
Evangelos Assimakos, investment director at Rathbones Investment Management, said, “We don’t dispute the fact that small and medium-sized businesses in the UK have been seriously abolished in recent years, offering attractive value compared to the historic long-term average.”
However, he warned that investors should be aware of changes that may have occurred in recent years. He cited the “significantly harmful effects” of Brexit on the UK stock market and the withdrawal of UK institutional investors from domestic stocks that “deleted a significant source of demand” for small caps.
The UK pension fund held just 4.4% of its domestic equity capital, according to a survey by Think-Tank New Financial last year, down from 15% in 2015.
“Whether the impact of (this) reversal over the next few years will likely play a key role in how quickly we can see the catalyst for reassessment in small and medium-sized businesses in the UK,” Asimakos said.
