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.
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.
-
Investors will reap long-term rewards from UK equitiesOpinion Nick Train, portfolio manager, Finsbury Growth & Income Trust, highlights three UK equities where he’d put his money
-
The graphene revolution is progressing slowly but surelyEnthusiasts thought the discovery that graphene, a form of carbon, could be extracted from graphite would change the world. They might've been early, not wrong.
-
'Investors will reap long-term rewards from being bullish on UK equities'
Opinion Nick Train, portfolio manager, Finsbury Growth & Income Trust, highlights three UK equities where he’d put his money
-
The graphene revolution is progressing slowly but surely – how to invest
Enthusiasts thought the discovery that graphene, a form of carbon, could be extracted from graphite would change the world. They might've been early, not wrong.
-
A strong year for dividend hero Murray International – can it continue its winning streak?Murray International has been the best-performing global equity trust over the past 12 months, says Max King
-
The shape of yields to comeCentral banks are likely to buy up short-term bonds to keep debt costs down for governments
-
The sad decline of investment clubs – and what comes nextOpinion Financial regulation and rising costs are killing off investment clubs that once used to be an enjoyable hobby, says David Prosser
-
How to profit from the UK leisure sector in 2026The UK leisure sector had a straitened few years but now have cash in the bank and are ready to splurge. The sector is best placed to profit
-
Who won the streaming wars?The battle of the TV and film streaming giants for dominance looks to be entering a final phase. The likely winner may surprise you, says Simon Wilson
-
'Investors should expect a good year for equities'Opinion The economy is positive, and investors are still cautious, says Max King
