Portfolio Manager
While UK smaller companies have been out of favour, signs are positive for a long-awaited revival. Despite media headlines painting a picture of perpetual doom and gloom hanging over the country, the UK has delivered four consecutive years of GDP growth above market expectations. The resilience of the economy in the face of numerous challenges has been nothing short of remarkable, perhaps indicating strong foundations that could provide a springboard for the UK small cap sector.
Macro and valuation factors favour small caps
Why are we turning positive on UK smaller companies? Well, first off we are encouraged by data from Panmure Liberum and the Bank of England showing that the UK household sector has shifted from a £750 billion net debt position in 2008 to a net cash position at the end of 2025*. Any uptick in consumer confidence, or further reductions in interest rates, could see some of this cash being put to work in the economy, and lifting the profits of smaller companies. We have also observed an increase in workforce participation rates, rising from 63% to 64%* in recent years and now running above market forecasts, which could present an upside risk to growth projections.
Along with many other UK equity fund managers, we have been highlighting the attractive valuation of the UK equity market for the best part of a decade. However, as we head into 2026, there is a clear discrepancy not only between the UK and the rest of the world, but also between UK large caps and UK small caps. UK large caps remain attractively valued, but UK small cap equities are currently trading towards the bottom of their historical valuation range and, unusually, at a discount to large caps—despite their higher future growth potential and earnings power.
Smaller companies provide diverse opportunities
Private equity buyers and corporates across the globe are taking advantage of the opportunity to purchase world-class companies at attractive prices. There has been a surge in merger and acquisitions activity in the UK market in recent years, with no sign of this trend abating as we move further into 2026.
While UK small caps have underperformed their large-cap counterparts in recent years, there is a very clear and sizeable trend of outperformance over the long term. The UK small cap universe is incredibly diverse, with over 50% of smaller company revenues coming from overseas markets and spanning a wide range of industries. Many of these companies are market leaders in niche areas or are driving technological and business model advancements.
The diversity of the UK small cap market means investors can access businesses with unique growth drivers, resilient earnings profiles, and the ability to adapt quickly to changing market conditions. While the macro situation does look to have turned supportive, in some ways it doesn’t matter what the next UK GDP or consumer confidence print is. The UK small cap market provides a wealth of attractive opportunities whatever the economic backdrop.
JPM UK Smaller Companies Fund
With the vast resources at our disposal at J.P. Morgan Asset Management, along with decades of experience investing in this part of the market, we are well placed to take advantage of the exciting opportunities available in the UK small cap market. With less analyst coverage than for larger companies and a much larger universe of stocks to choose from, smaller companies can provide significant alpha generation potential, as reflected in the track record of the JPM UK Smaller Companies Fund. Over the 10-year period to the end of 2025, the fund has returned 94.1%, compared to the index return of 60%.