Ten years after the United Kingdom's vote to leave the European Union, a prominent fund manager suggests that smaller UK companies are now undervalued and positioned for future profit. Matthew Tillett, who manages the Premier Miton UK Value Opportunities Fund, argues that while the decade since the Brexit referendum has presented challenges, the disaster scenarios predicted by some politicians have not materialized.
Tillett points to the UK's Gross Domestic Product (GDP) growth, which averaged 1.5% annually between 2015 and 2025. This rate ranks third among G7 economies during that period, behind only Canada and the United States. On a per capita basis, UK GDP growth averaged 0.8%, placing it fifth within the G7. He also noted that the pound's sharp depreciation, predicted by former Bank of England Governor Mark Carney, helped to shield the economy from some negative trade effects, although it made the UK less wealthy relative to the rest of the world.
Stock Market Performance Diverges
A significant trend observed in the post-Brexit era has been the underperformance of UK smaller companies compared to their larger counterparts. The Deutsche Numis Small Companies index saw a total return of 89% (6.6% annualized) from the eve of the referendum, while the large-cap Bloomberg UK 100 index returned 143% (9.3% annualized). Tillett attributes this disparity partly to fundamental differences: smaller companies are often more domestically oriented and sensitive to economic cycles and interest rates, making them more vulnerable to the volatile macroeconomic climate.
In contrast, the Bloomberg UK 100 index includes many international companies whose earnings were bolstered by the weaker currency. Earnings growth between 2015 and 2025 reflects this, with the Bloomberg UK 100 index growing earnings by 7.0% annually, compared to 5.8% for the Deutsche Numis Small Companies index. However, Tillett believes this fundamental difference alone does not account for the full underperformance.
The Impact of the 'Crisis Narrative'
Tillett identifies a persistent "crisis narrative" surrounding the UK economy as a key factor in the de-rating of smaller company valuations. Despite Brexit not triggering an immediate economic crisis, a continuous sense of impending challenges—from trade deal uncertainties and political shifts to the pandemic and cost-of-living crises—has weighed on investor sentiment. This has led to consistent outflows from UK equity funds, totaling over $160 billion since the UK's formal exit from the EU in 2020, exerting downward pressure on valuations.
The price-to-earnings (P/E) multiple for the Deutsche Numis Smaller Companies index has fallen from 15x in 2015 to 11x (based on 2026 consensus estimates), representing a valuation de-rating of over 25%. This significant headwind, Tillett argues, is the primary reason for the underperformance of UK smaller companies.
Outlook for Smaller Companies
Despite the past decade's challenges, Tillett sees a more promising outlook for UK smaller companies. Investor expectations have shifted dramatically; the current low expectations are reflected in valuations, making entry points more attractive than a decade ago. The dividend return alone now exceeds 4%, and the risk of further valuation de-rating appears reduced.
Furthermore, the fundamental macroeconomic backdrop, while still complex, is arguably more stable than in recent years. The initial dislocations from Brexit are in the past, and some political factions are now advocating for closer cooperation with the EU, which could be a positive development. The UK economy has also demonstrated resilience.
UK companies themselves are in solid shape, with record share buybacks and a notable increase in acquisitions by overseas competitors and private equity firms, who are keen to capitalize on perceived value. This suggests a strong capacity for future investment and growth.
In a global market increasingly dominated by a few large technology companies, Tillett highlights UK smaller companies as an asset class offering diversification. With a wide range of quality companies across various industries at attractive valuations, relative not only to global equities but also to their own historical levels, they present a compelling case for investors seeking to diversify their equity exposure.