Will UK smaller companies bounce back in 2023?

Article 13 March, 2023

Will UK smaller companies bounce back in 2023?

Although the UK continues to face economic headwinds, we believe that UK smaller companies should bounce back strongly when markets recover.

Written by

George Ensor

Is the tide starting to turn?

Over the last 3-4 months we’ve seen an improvement on key market drivers that will have a distinctly pro-domestic / small cap impact in 2023¹.

Interest Rates - were expected to peak >5.6%. Current expectations are a peak rate of 4.3%, with a faster decline.
Sterling - strengthened by 12% against the dollar.
Energy - gas price expectations for Jan were >450p thm, the actual price was 158p thm.
Inflation - realised inflation has started to come in below expectations and inflation expectations have fallen.

UK smaller companies has already rallied 14.7% since the market low in Oct¹. However, when you consider the sectors start point in 2023 is last year’s period of relative underperformance, the largest since 1989, it’s hard not to see the potential upside going forward.

(¹R&M Smaller Listed Companies Monthly Commentary, Jan 2023)

Exceptional valuation opportunity

The smaller companies benchmark began the year on just 8x earnings, down from 17x at the start of 2022. This is one of the lowest starting multiples in over forty years². (²Elroy, Dimson, Scott Evans and Paul Marsh, Numis Indices: 2023 Annual Review.)

Whilst we don’t rule out continued economic turbulence, we would expect all these factors to play a critical role in corporate earnings in 2023. That’s why we suggest that, with much of the negativity surrounding the UK already priced in, UK smaller companies could do very well when the economic tide inevitably turns.

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A core, risk managed, solution to UK Small Companies sector
Repeatable bottom-up investment process, capturing UK opportunity set
A pragmatic investment approach which is style agnostic
Strong risk adjusted returns

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