UK smaller companies are the most unloved stocks in the world, new research from abrdn has revealed.
The global investment manager said UK smaller companies are currently trading at a discount of -23.4% to their 10-year average up to 31st January 2025; the widest of any major region.
It looked at the 12-month forward P/E ratio, which compares current share prices to estimated future earnings per share for the next year. European small caps (-19.8%) were second cheapest by historic standards, followed by Chinese large caps (-11.5%) and Japanese small caps (-8.8%). The UK and Japan are the only markets where both small caps and large caps have 12-month forward P/E ratios that are below their 10-year average.
According to the report, smaller companies globally are trading at a discount of -3.2% compared to their 10-year average 12-month forward P/E ratio when looking at the MSCI All Country World Index. However, UK smaller companies showed the greatest discount of -23.4. This is despite the fact that UK smaller companies are forecast to grow their earnings by 10% over the next year.
Abby Glennie, co-manager of the abrdn UK Smaller Companies Fund and the abrdn UK Smaller Companies Growth Trust, said: “These discounts reflect the negative sentiment that we’ve seen towards UK smaller companies in recent times. True it’s been a tough period for the sector, with weaker performance and tightening regulation. But ultimately negative sentiment is just that – sentiment. When you look at the fundamentals, there are many brilliant smaller companies in the UK who are outperforming global and much larger rivals in terms of earnings growth.
“Investing in smaller companies can be volatile but for those willing to take a long-term view, the current scale of discounts could present an attractive opportunity.”
Abrdn said the markets trading at the largest premiums to their averages over the past decade are Chinese small caps and US large caps.
Glennie added: “For investors looking for diversification, an exposure to small caps could be very helpful. In recent years stock market performance has been dominated by the US and particularly the “Magnificent 7” tech companies. However, there is increasing awareness that the narrowness of this outperformance is unhealthy and leaves the large cap benchmark subject to setback should any of these companies fail to deliver on investor expectations.”
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