LIVE MARKETS-Small caps step into the spotlight as yields overtake FTSE giants

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SMALL CAPS STEP INTO THE SPOTLIGHT AS YIELDS OVERTAKE FTSE GIANTS

UK small‑cap stocks yielded more than large caps last month for the first time in two decades, a shift that fund managers say reflects improving sentiment toward the domestic market after a strong 2025 performance.

For context, UK large caps were among the best performing major global equity segments last year, helping revive interest in UK assets after prolonged outflows. The FTSE 100 returned almost 26% over the year, outperforming both U.S. and global equity markets.

Aberdeen Investments said the bottom 10% of the UK Main Market by market value generated an average dividend yield of 3.4% in January, above the roughly 3% yield on large-cap peers. That comes as investors reassess the appeal of smaller companies, whose valuations remain heavily discounted.

Abby Glennie, manager of the Aberdeen UK Smaller Companies funds, said small caps are now exhibiting many of the same characteristics that supported large-cap outperformance in 2025.

"Valuations appear attractive, income is improving and the quality of businesses is sometimes overlooked," she said, adding that around half of revenues for UK small caps come from overseas, offering diversification beyond the domestic cycle.

The broader macro backdrop has also shifted, inflation has eased, unemployment remains low and sterling is firm, supporting foreign currency earnings. Meanwhile, capital discipline, which is a key driver of the FTSE 100's surge last year is becoming more visible in the mid-cap space, with roughly 100 FTSE 250 companies running share buybacks.

Small caps still trade at a near 25% discount to large caps, wide by historical standards. Analysts say that if domestic outflows stabilize, the segment could benefit from renewed demand as investors look beyond last year’s narrow global market leadership.

(Rashika Singh)

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