Hargreaves Lansdown has expressed confidence in the investment potential of the º£½ÇÊÓƵ's smallest companies, forecasting a rally in the FTSE small cap sector due to its low valuations.
The Bristol-headquartered investment platform characterised the smaller companies investment arena as "compelling," highlighting that over the past five years, the FTSE small cap index (excluding investment trusts) has yielded a return of 78.3 per cent, as reported by .
This performance surpasses the 72.9 per cent growth of the FTSE 100 and the 41.7 per cent return from the FTSE 250 index (excluding investment trusts).
Hargreaves Lansdown stated: "At current undemanding valuations, there's an opportunity for investors to add excellent long-term growth potential to their portfolios."
Despite the robust returns of the FTSE small cap index, Joseph Hill, senior investment analyst at Hargreaves Lansdown, noted that domestic equities have not garnered significant interest from investors.
Data from Calastone reveals that British investors have withdrawn funds from º£½ÇÊÓƵ equity funds for 46 out of the last 47 months, with £521m being withdrawn in April alone.
The small companies sector has been most severely impacted as available cash for fund managers to invest gradually diminishes. In 2021, both Columbia Threadneedle and Aviva closed their º£½ÇÊÓƵ smaller companies funds, which had been operational since 1998.
Hill commented: "This downward pressure on stock prices has seen º£½ÇÊÓƵ equity valuations trading at well below their long run averages, and particularly in small cap."
º£½ÇÊÓƵ small caps have historically traded at a 37 per cent average premium compared to the broader British market, based on a 12-month forward price to earnings ratio. However, this ratio is currently significantly lower.
Furthermore, British small caps have typically outperformed the FTSE 100 following an interest rate cutting cycle. With the Bank of England anticipated to continue reducing rates throughout the remainder of 2025, this trend could persist.
Berenberg's research revealed that in the year after an interest rate cut, º£½ÇÊÓƵ smaller companies' valuations have traditionally grown by 9.3 per cent, compared to a mere 6.5 per cent for the FTSE 100.
Hill pointed out that last year, the average takeover on the º£½ÇÊÓƵ equity market was at a 44 per cent premium, suggesting that stocks were trading considerably below their true value.
"From a business owner's perspective, the motivation to IPO when valuations are low, is understandably limited," Hill commented.
He added: "It's been a tough time, and with the headwinds faced, investors would be forgiven for thinking the sector had been best avoided. But that would've meant missing out on some pretty good returns."
