Small caps: how to ride the recovery wave of UK equities
Professional investor Ken Wotton highlights British small caps that hit the sweet spot of the British equity market
British small caps have demonstrated remarkable resilience, outperforming blue chips over the past year. Fuelled by a surge in takeover activity, investors’ interest in the sector has ignited – yet stocks remain materially undervalued. With a backdrop of anticipated interest rate cuts and a new government committed to stability, we believe the stage is set for investors to capture long-term growth in this asset class.
Our focus is on this “sweet spot” of UK equities. By taking significant stakes in our holdings, we can use our private equity expertise by engaging with firms’ boards to support value creation. This approach enables us to curate a concentrated portfolio of exceptional companies in structurally growing sectors.
British small caps: a wealth of opportunity
The UK wealth-management sector is a burgeoning market, underpinned by robust structural growth drivers including rising household wealth, a persistent advice gap and supportive government policies. Despite the sector being “out of favour”, well-positioned businesses that can weather the storm will emerge stronger as inflation cools and interest rates decline, stimulating positive fund flows.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Brooks Macdonald (Aim: BRK) is a prime example. Its recent transformation and investment initiatives have positioned it for robust asset growth and improved profitability as market conditions improve. While we do not base investment decisions on potential takeover speculation, note that the sector’s consolidation is driven by private equity’s interest in high-quality businesses at attractive valuations. This dynamic provides a degree of downside protection. However, we anticipate that the market will eventually recognise the company’s exceptional qualities, leading to a substantial rerating of its shares.
The UK residential lettings market is experiencing several favourable long-term trends. These include the challenge of home-purchase affordability (exacerbated by elevated interest rates), the relative lack of new construction and the depressed supply of rental stock.
The Property Franchise Group (Aim: TPFG) has just become the UK’s largest franchised multi-brand estate agency group through its merger with Belvoir Group.
TPFG generates its revenue by collecting franchise fees in exchange for a suite of support services, which provides TPFG with a highly attractive and resilient earnings profile throughout market cycles. In addition, as UK residential housing sales volumes begin to recover, TPFG is well placed to benefit through its sales and mortgage-broking exposure. Green shoots of this cyclical recovery are evident, with TPFG reporting a 16% like-for-like increase in its pipeline of agreed sales in June 2024, marginally ahead of the 15% recorded for the wider UK residential housing market.
Costain Group (LSE: COST), a leading infrastructure engineering and consultancy services provider, should capitalise on several tailwinds. The state’s substantial £700 billion infrastructure investment pipeline over the next decade presents ample growth opportunities across Costain’s core markets of transport, water, energy and defence. Furthermore, the increasing emphasis on sustainability aligns perfectly with the company’s record of delivering positive environmental and social outcomes.
The adoption of industry best practices, as outlined in the government’s Construction Playbook, is shaping the market in a way that favours Costain’s expertise in risk management and operational excellence. Costain’s strong balance sheet provides scope to invest in growth initiatives and navigate potential industry challenges.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Ken Wotton is lead manager of Strategic Equity Capital plc and Managing Director, Public Equity at Gresham House and leads the investment team managing public equity investments. Alongside this, he is manager for WS Gresham House UK Micro Cap Fund, WS Gresham House UK Multi Cap Income Fund and manages AIM listed portfolios on behalf of the Baronsmead VCTs. Ken graduated from Brasenose College, Oxford, before qualifying as a Chartered Accountant with KPMG. He was an equity research analyst with Commerzbank and then Evolution Securities prior to spending the past 12 years as a Fund Manager at Livingbridge and now Gresham House specialising in smaller companies.
-
Investors pull money from UK equities as government warns of “painful” Budget
The government’s post-election honeymoon period has been short-lived, and investors are shying away from UK equities as a result
By Katie Williams Published
-
Top global fintech companies to invest in
One British fintech hogs the headlines, but there are two top performers in the US. We explain where you should put your money
By David C. Stevenson Published
-
Top global fintech companies to invest in
One British fintech hogs the headlines, but there are two top performers in the US. We explain where you should put your money
By David C. Stevenson Published
-
Qualcomm could acquire rival Intel – but securing the deal won't be easy
A tie-up between Qualcomm and its semiconductor rival Intel would be a coup. But multiple regulatory and commercial hurdles lie ahead.
By Dr Matthew Partridge Published
-
How Finseta is cashing in on currencies
Finseta has established a foothold in the upper echelons of the market for international payments. Should you invest?
By Dr Mike Tubbs Published
-
Top trusts that offer growth at a discount
Professional investor Alastair Laing picks three trusts where he'd put his money
By Alastair Laing Published
-
How to invest in the quiet market months
Here's how to invest in the quiet market months, since “sell in May” hasn’t paid off this year.
By Cris Sholto Heaton Published
-
What's next for oil prices?
How are world economies affecting oil prices and the demand for oil?
By Alex Rankine Published
-
Spire Healthcare: invest in the booming demand for private healthcare
Spire Healthcare is one of the few listed companies benefiting from the growing trend in private healthcare. Should you invest?
By Rupert Hargreaves Published
-
Are insurance companies a good investment?
Costs may be soaring but the insurance sector is currently going through one of its most profitable periods. The market has been slow to realise the opportunity here
By Rupert Hargreaves Published