UK Small Caps unloved after Brexit breakup
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·???????? UK Small Caps unloved after Brexit breakup
The FT published an article titled ‘UK small caps “most unloved” stocks in the world’. The article explains that UK small-cap stocks have forward price/earnings (P/E) ratio 24.3% below the 10-year average. This significant discount reflects negative sentiment towards UK smaller companies, driven by factors such as Brexit and a shift in investor risk attitudes post-Covid. Despite this, some experts believe that the current low valuations present an attractive opportunity for long-term investors.
The analysis by Abrdn shows that UK small-cap stocks are the cheapest by historical standards compared to other major global stock markets. European small caps follow closely, with a forward P/E ratio 19.8% below the 10-year average. In contrast, US large caps are trading at a 29% premium to their 10-year averages.
Chancellor Rachel Reeves is looking to boost retail and institutional investment in the UK after a period of sustained outflows from domestic equities. Experts see potential in UK small caps, citing their strong earnings growth and improved capital allocation.
However, challenges remain. Brexit has had a detrimental effect on UK equity markets, and the retreat of UK institutional investors from domestic stocks has removed a key source of demand for small caps. UK pension funds now hold just 4.4% of their funds in domestic equities, down from 15% in 2015.
The current undervaluation of UK small-cap stocks indeed presents a potential opportunity for investors willing to take a long-term view. While the sector has faced challenges, including Brexit and reduced domestic investment, there are still many high-performing smaller companies in the UK. The key is to identify those with strong growth potential and resilience. However, investors should remain cautious and consider the broader economic and political landscape, as these factors could impact the recovery and performance of these stocks.
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