While small- and medium-sized UK companies may still be facing financing headwinds, the outlook for small caps is “very positive”, according to Alex Wright, manager of the Fidelity UK Opportunities fund.

“Whilst I don’t expect a period of very strong economic growth – GDP growth will probably remain low for some time to come – I think a reasonably stable environment will be enough to favour smaller companies as corporate expenditure starts to pick up, especially in areas such as technology and media.  Increased availability of finance at low rates will also lead to smaller companies becoming better placed,” said Wright.

He notes that in today’s market, the FTSE Small Cap Index is trading on a price/earnings multiple of only 11 times, and companies with less than £150 million ($246 million) are trading at just 9 times. This is almost a 30 per cent discount to the valuations of the mid cap FTSE 250 Index.

UK small caps have already gained some momentum, he points out, returning almost 28 per cent over the 12 months to the end of April, becoming the best performing IMA sector.

“Increasing M&A activity will also have a positive impact on the sector. Large companies will come under increasing pressure to use their growing cash piles and, with attractive valuations, it would not surprise me if we continue to see a growing number of smaller companies being bid far at a premium to current share prices,” said Wright.