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According to ABRDN’s analysis, stocks of small British companies are the “most unpopular” in the world as investors have cut their holdings in the UK and invested in U.S. tech giants.
According to asset managers, the forward price/income rate of the MSCI UK small CAP stock index fell to 24.3% of the 10-year average at the end of January, the biggest discount in any major region in the world.
Investors use forward price/revenue rates (comparing the company’s value to expected profits) as a standard for historically expensive stocks or other stocks.
Prime Minister Rachel Reeves hopes to promote retail and institutional investment in the UK after a period of continuous outflow from domestic stocks.
“These discounts reflect our recent negative sentiment towards smaller companies in the UK,” said Abby Glennie, co-manager of Abrdn’s smaller companies fund. She added that while “a difficult time for the industry”, “in the UK, many of the more brilliant smaller companies outperform global and larger competitors in terms of revenue growth”.
While investing in smaller companies can be turbulent, Glenny said, “the current discount scale may present an attractive opportunity for those willing to take a long-term perspective.”
ABRDN compared the price-to-earnings ratios of the MSCI index in major stock markets around the world and found that small British stocks were the cheapest in historical standards, followed by small European hats, with a 19.8% lower forward P/E ratio.
Globally, the 12-month forward rate of small companies is 3.2% lower than their 10-year average, while the larger companies are 20% higher than their historical average.
“If you think of this period coming from a common period, when we see rising interest rates and rising inflation, we see that the market does change in its risk attitude,” Glenny said. “People just don’t want to have risky assets and they see the little hat as the bottom of the industry.”
MSCI’s small cap index captures 14% of each country’s free-floating adjusted market cap.
Darius McDermott, managing director of Chelsea Financial Services, said he could “absolutely see an opportunity” to buy the small British hat. “Everyone has been selling since Brexit,” he said, explaining that smaller companies in the UK, domestically oriented, have suffered more outflows than their larger peers with overseas operations.
“Of the funds we recommend, we are overweight for smaller companies in the UK,” McDermott said. He said the industry “absolutely has better capital allocation than before” and increased its share buyback and dividend yields.
Over the past few years, global stock market growth has been dominated by the “magnificent seven” U.S. technology stocks, with the soaring value of these stocks, driving the S&P 500 for large U.S. stocks to an all-time high last year.
According to ABRDN’s analysis, the U.S.’s large cap is at a premium of 29% with its 10-year average, based on the forward price-to-earnings ratio at the end of January.
China’s small hats are the most expensive compared to historical levels, as their profits drop lower investors’ expectations for future income, resulting in an increase in their avant-garde ratio.
Jason Hollands, managing director of investment platform Bestinvest, said the outlook for a trade deal between the United States and the United Kingdom increased “should be seen as encouraging news, which could also help restore some optimism in UK stocks”.
He added: “UK is not our current market for choice at the moment, but it should not be completely ignored either.” He noted that the huge seven stocks have fallen 3% since the beginning of the year, while the “boring old ftse 100” has risen 6%.
Evangelos Assimakos, investment director at Rathbones Investment Management, is cautious: “The smaller UK companies in recent years have been severely deviated and have compelling value in recent years compared to the historic long-term average.”
However, he warned that investors need to “recognize any changes that may have occurred in recent years that may be permanent or take a long time to be revoked”. He cites the “clearly harmful effects” of Brexit on the UK stock market and the retreat of British institutional investors from domestic stocks that “eliminate the key source of demand for small hats”.
According to a study by think tank New Finance, the UK pension fund holds only 4.4% of its funds in domestic stocks, down from 15% in 2015.
“Is there any impact? [this] In the coming years, the reversal may play a key role in the speed at which we see the catalysts revaluated by smaller companies in the UK,” Asimackos said.
