UK smaller companies: keeping calm and carrying on

2025 has started with a barrage of bad news on the UK: economic growth is elusive, government debt is rising, consumers are nervous. The temptation is to draw similar conclusions on the outlook for the UK stock market, and its smaller companies in particular. We believe the reality is more nuanced.

This environment isn’t new. The UK has operated with structurally low growth rates for more than a decade. The UK’s smaller companies are well-versed in navigating difficult periods and they have been through worse than this – the financial crisis, Brexit, the mini budget – and emerged thriving. Neither is this environment new to us. The abrdn UK Smaller Companies Growth Trust’s quality, growth, momentum process has been in place since the launch of the smaller companies team in 1993 and has seen multiple cycles.

Growth opportunities

Now, as always, there are pockets of real opportunity in the UK and as investors, we need to look beyond the label. For the consumer, for example, it has unquestionably been a tough period for some parts of the market. Food retailers saw sales volume drop 0.3% month on month in December, with the usual Christmas bounce proving elusive. While household saving rates remain at post-pandemic highs, consumers are being careful.

However, there are areas where they are willing to spend – on holidays, for example. We have a holding in Jet2, and the company has continued strong trading momentum. It has given its customers exactly what they want – compelling prices, good service, and value for money. It has continued to grow and invest, expanding its presence at Luton Airport. Its strong management team has managed to avoid many of the pitfalls of its competitors.

Cranswick and Premier Foods are other examples. Although the food sector has been tough, these businesses have leveraged their strong relationship with retailers and have shown they can manage inflationary pressures as they arise. Both groups had strong trading through the Christmas period, in contrast to some of their competitors. They are focusing on range, premiumisation at good value for the consumer, and are alert to changing consumer habits. In Cranswick’s case, the ability to supply from farm to fork means they are in charge of their own destiny.

While Cranswick, Premier Foods and Jet2 are all nominally consumer businesses, and it is natural to assume that they would be vulnerable to a downturn in fortunes for the UK economy, they have shown real resilience in earnings whatever the economic weather.

On the Trust, we are trying to lean into the realities of the UK economy, rather than fight against them. For example, XPS Pensions was one of our strongest holdings in 2024. It is a leading UK consulting and administration business specialising in the pensions sector and is a beneficiary of the UK’s ageing population, which is driving a greater emphasis on later-life financial provision.

Focusing on quality

As with previous periods when sentiment has been poor and growth hard to come by, avoiding problems is vitally important. Where companies have issued profit warnings – and there have been plenty around in the UK market – they have been dealt with harshly by investors.

Certain quality characteristics become more important in less forgiving environments. At a time when bond yields are volatile, for example, companies with high debt are vulnerable. Companies need good management teams to steer their businesses at a time when demand may be slower, to invest strategically, and make sensible long-term decisions amid all the noise. In the longer term, they can help a business capitalise on difficult environments and emerge stronger.

Companies need to be in charge of their own destiny and to find efficiencies where they can. As an example, we would highlight Games Workshop. It is a manufacturer of fantasy and futuristic miniatures, games, and hobby supplies, including the Warhammer brand. It has a loyal client base, and no one else does what it does. It has significant intellectual property and a sensible management team used to managing through tough markets.

It is also worth noting that when sentiment is brittle, it can provide opportunities. Over the past few months, we have added a range of new names: Bloomsbury Publishing, Avon Technologies and Breedon, for example. These fulfil our high-quality criteria, and are forecast to deliver resilient earnings, whatever the economic climate.

Better times ahead?

A final question is whether the economic backdrop can change. While our holdings can navigate the current environment, a more buoyant growth outlook would be welcome. There are signs that the UK government is now turning its attention to growth. There are levers it can pull, on tax, on deregulation, on reform. For the time being, it is all warm words and little action, so we maintain a watching brief.

One factor that might make a difference is changes to the defined benefit pension rules. The government has proposed new rules to make it easier for companies to access the surpluses from defined benefit schemes. While the mechanism is complicated, it should increase the options available for pension schemes, and this additional choice could influence the way schemes invest. High-growth UK assets such as smaller companies could be a beneficiary.

Other supportive measures could include the introduction of a tax incentive for UK savers to support home grown companies. This would help to create an ecosystem of funding for smaller businesses. Equally, it would be helpful to simplify disclosure and reporting obligations. We would also welcome any plan to cut or remove stamp duty on shares.

In the meantime, we continue to focus on resilient companies that can thrive in a range of conditions.

Amanda Yeaman, co-manager of abrdn UK Smaller Companies Growth Trust.

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