60 seconds with Paul Marriage on the outlook for small caps
Ahead of the UK's referendum on its EU membership, Paul Marriage explains why neither outcome will necessarily be bad for UK smaller companies.
8 June 2016
It will come as little surprise that the outlook for UK small caps at the moment is dominated by the EU referendum.
Typically, a big uncertain event like a referendum is not particularly favourable for small caps - being the riskiest end of equities.
The market should be quite good at pricing in the potential risk of an "out" vote, so markets might be weak. There will be some great buying opportunities in long-term small caps if that is the case.
If we were to vote stay in then, the chances are there will be a post-referendum rally. Small caps will do well in that case; they did very well in the same scenario last year after the UK election.
So, there are two ways it could pan out. Both are slightly different, but in the end not necessarily all that bad for our sector.
Small cap outlook
Interestingly, companies are pretty sanguine about the referendum. No-one is jumping up and down saying the world is fantastic; there are patches of weakness everywhere in Asia, US and even the UK, where consumer isn’t that strong.
But we think expectations are modest this year and a forward earnings multiple of 12.5 times is not too rich for UK small caps overall. So, we are feeling modestly optimistic about the situation, mindful of the many bricks in the wall of worry
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