The UK mid- and small-cap market has delivered excellent long-term returns which have outpaced the FTSE 100 in two years out of three for the past 60 years.
However, more recently, this trend has reversed, with the FTSE 100 posting strong performance in the immediate aftermath of the UK’s referendum to leave the EU while the FTSE 250 faltered.
This change reflects a combination of factors, the most significant being the greater exposure of mid and small caps to the UK economy, compared to the highly international nature of the FTSE 100.
Interestingly, however, while perceptions may have changed, the UK’s economy reality has stayed robust since the EU referendum, with growth actually outpacing forecasts as consumption held up better than anticipated.
KEY STRUCTURAL DRIVERS
It is also worth reminding ourselves of the very first point: why has exposure to the mid- and small-cap market been so beneficial over the long term and can this be sustained in the future?
In our mind, there are three key structural drivers and, whatever the outcome of the Brexit negotiation process, these will remain true.
Higher growth
Smaller companies by their nature are better able to generate higher growth which is not as dependent upon the strength of the economy, unlike their large-cap counterparts.
Nimble businesses
This segment of the market can adapt to most forms of change. There are many examples of disruptors in this part of the market, who can challenge incumbents and find creative ways of growing even when external forces may be changing and/or stacked against them.
