Anticipated Boom in FTSE Small Caps due to Lower Evaluations, according to Hargreaves Lansdown
UK Small-Cap Stocks Gain Favourable Outlook as Hargreaves Lansdown Endorses Sector
Financial services firm, Hargreaves Lansdown, has expressed optimism for the UK's small-cap sector, predicting a potential rally due to its relatively low valuations. The investment platform identified the small-cap sector, which it deems "compelling," as poised to deliver notable returns, over the past five years, the FTSE small cap index (excluding investment trusts) has returned 78.3%.
This outperformance is noteworthy, considering the FTSE 100's return of 72.9%, and the FTSE 250 index's (excluding investment trusts) return of 41.7%. Joseph Hill, senior investment analyst at Hargreaves Lansdown, suggests that this presents an opportunity for investors to include long-term growth potential in their portfolios.
However, British investors have shown little interest in domestic equities, with fund managers struggling to find capital to invest in the sector. In April alone, £521m was withdrawn from UK equity funds, according to Calastone data.
The small-cap sector has been particularly affected by this lack of investment, with funds such as Columbia Threadneedle and Aviva shutting down their UK smaller companies funds last year. Joseph Hill attributes this downward pressure on stock prices to low investor interest, resulting in valuations trading significantly below their long-run averages, particularly in small caps.
Despite these challenges, UK small caps have historically demonstrated resilience and have outperformed the FTSE 100 following an interest rate cutting cycle, as the Bank of England is expected to continue slashing rates throughout 2025. Research from Berenberg revealed that in the year following an interest rate cut, the valuations of UK smaller companies have grown by 9.3%, compared with just 6.5% for the FTSE 100.
Hill also notes that last year, the average takeover premium on the UK equity market was at 44%, indicating undervalued stocks. However, from a business owner's perspective, the motivation to initial public offering (IPO) when valuations are low is understandably limited.
In summary, while the UK small-cap sector has faced numerous hurdles, its resilience, growth potential, and the current undemanding valuations have made it an appealing investment opportunity for those seeking long-term growth prospects. However, this sector remains volatile and riskier than the more established FTSE 100 and FTSE 250 indices.
Investors may find appealing opportunities in UK small-cap stocks, as Hargreaves Lansdown predicts a potential rally due to their low valuations, which are trading significantly below their long-run averages. This sector, deemed "compelling," has historically demonstrated resilience, outperforming the FTSE 100 following an interest rate cutting cycle, a scenario the Bank of England is expected to continue throughout 2025.
