In our small company round up three fund managers highlight what they think may be in store for smaller companies in 2025.
Alan Rowsell, Fund manager, Premier Miton Global Smaller Companies Fund
All the pieces appear to be in place for global small caps to have a strong year in 2025. Valuations are low, profits are improving, inflation is down, interest rates are being cut and economies are recovering. That is a pretty good set up for small-caps so the outlook is promising. However, this has been the story for the last year yet small-caps have not outperformed. The reason is probably because the recovery has been a bit sluggish so far. What we need is something to turbo-charge it and the next US President may be the person to do it!
Donald Trump divides opinion but one thing that is looking increasingly likely is that his administration will be good for smaller companies. As his policy agenda starts to take shape, it looks increasingly likely that it will be pro-business, pro-growth and pro-domestic companies via a range of tax cuts, deregulation and trade tariffs. Smaller companies should be the main beneficiaries as they tend to be focused domestically while larger, multi-national companies could suffer from trade tariffs. Industrials, energy, tech and financial sectors look like being particular beneficiaries.
Globally, a move towards reshoring of manufacturing and a shortening of supply chains as a result of trade disputes is likely to negatively impact larger companies more than smaller ones and potentially provide a boost to those smaller companies focused on the right areas. Given that global small-caps have been out of favour in recent years and valuations are relatively low, this could be the spark that finally gets them going.
Paul Marriage, Fund manager, TM Tellworth UK Smaller Companies Fund
We end 2024 with the same sort of cautious optimism that we ended 2022 and 2023. Will 2025 finally fulfil that heady expectation? The reasons to be cheerful are that the sector generally trades well in an interest rate cutting pro-domestic environment. Our portfolio is not especially rate sensitive, and we are not over-reliant on UK revenues in most of our investments, of course. The Budget has not dealt a fatal blow to the AIM market as feared a few weeks ago. Moreover, our stocks have not re-rated upwards in any material way this year, valuations have remained resolutely modest and, in some cases, derisory.
What do we need to see to make our inherent optimism become a reality? The start of 2024 was marked by a high frequency and severity of incoming M&A, that dissipated over the summer as the Budget stalled some deals, but we believe there is evidence that buyers are now returning. The continuation of this theme sees global buyers from all walks of life – trade, private equity, sovereign wealth and any combination thereof – paying significant cash premia for UK plcs – but we assume they still think they are getting a good deal. This activity is real money nonmarket participants saying that the UK is too good an opportunity to miss. Logically market participants and asset allocators might then follow suit. The Chancellor’s Mansion House speech was a good opportunity to change the narrative post Budget and her proposals to encourage UK equity investing are helpful if lacking in detail. We expect the first long term asset funds (LTAFs) to start allocating to UK smaller companies in the first half of 2025. These are a very welcome new buyer to the market.
The groundhog half decade of expectant revival in the sector is now firmly in broken record territory. We have moved on from broken clocks, as they don’t seem to generate buyers once a day let alone twice. We believe those that are brave enough to be invested at the point of sentiment improvement, and thus endangered species contrarians, will be the ones to make the most money when the beans are counted.
Gervais Williams, Fund Manager, Premier Miton UK Smaller Companies Fund
After a relatively good year of steadily rising share prices in 2024, I suspect 2025 might be a lot more volatile. One of the features about asset markets is that they can be very spikey, especially at times of significant economic and political change.
Specifically, there is a risk that quite a few large-caps won’t be able to dodge the radically changing economic and political bullets. Clearly, quite a few small or micro-caps might get caught out as well. But there will be others that don’t just survive better, but also happen to be in exactly the right place at the right time and deliver quite exceptional returns.
Furthermore, if bond yields remain elevated, and there were to be a global recession, then various private businesses might become insolvent in significant numbers. Numerous zombie companies would potentially fail as well.
At times like this, there is scope for well financed businesses to accelerate their growth, as they expand into the vacated markets. Or better still buy an overleveraged, but otherwise viable business, debt-free from the receiver for a nominal sum – sometimes as low as £1. These kinds of acquisitions can sometimes deliver transformational returns for quoted small or micro-caps.
In short, for the first time since 2015, I believe 2025 will be defined by small and micro-cap outperformance. And given that UK small and micro-caps are currently standing at unusually lowly valuations, we believe they have great upside potential.
Risks:
The value of stock market investments will fluctuate, which will cause fund prices to fall as well as rise and investors may not get back the original amount invested.
Forecasts are not reliable indicators of future returns.
IMPORTANT INFORMATION:
For investment professionals only. No other persons should rely on the information contained within. This is a marketing communication.
Whilst every effort has been made to ensure the accuracy of the information provided, we regret that we cannot accept responsibility for any omissions or errors.
The views and opinions expressed here are those of the authors at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
Reference to any investment should not be considered advice or an investment recommendation.
All data is sourced to Premier Miton unless otherwise stated.
This document and all of the information contained in it, including without limitation all text, data, graphs, charts, images (collectively, the “Information”) is the property of Premier Fund Managers Limited and/or Premier Portfolio Managers Limited (“Premier Miton”) or any third party involved in providing or compiling any Information (collectively, the “Data Providers”) and is provided for informational purposes only. The Information may not be modified, reverse-engineered, manipulated, reproduced or distributed in whole or in part without prior written permission from Premier Miton. All rights in the Information are reserved by Premier Miton and/or the Data Providers.
Marketing communication issued by Premier Miton Investors. Premier Portfolio Managers Limited is registered in England no. 01235867. Premier Fund Managers Limited is registered in England no. 02274227. Both companies are authorised and regulated by the Financial Conduct Authority and are members of the ‘Premier Miton Investors’ marketing group and subsidiaries of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.
014925/061224