DJ: Parts of the UK market had a better time of it in 2024, but many small caps struggled again. What's your view on how the domestic market is positioned for 2025?
ST: Well, I think we’ve got to put valuations in context. 12 months ago, when we recorded the podcast, I said UK small caps had experienced the worst relative drawdown in over 20 years. Between September 2021 and October 2023 they underperformed large caps by 38 per cent. Since then, the FTSE Aim and the FTSE Small Cap indices have actually risen about 15 per cent each from that market low.
At the start of 2024, the earnings yield – the reciprocal of the price/earnings (PE) ratio – was about 10 per cent on both the Small Cap and the Aim indices. Aim has flatlined since then, or slightly dipped on a total return basis. The Small Cap index is up around 6 per cent, so it hasn’t done fantastically well in the context of what we’ve seen in the US markets, for example. So the bottom line is that both are still relatively cheap, both from a historical perspective and in absolute terms.