Matthew Tillett, who manages the Premier Miton UK Value Opportunities Fund, says UK smaller company shares look cheap and attractive ten years after the Brexit referendum, following a decade in which larger companies have consistently outperformed their smaller peers.
Tillett said the economic disaster warnings made before the 2016 vote did not come true. George Osborne had predicted "an immediate and profound economic shock," David Cameron warned "if we leave, we risk a recession," and then European Central Bank chief Christine Lagarde said "we have looked at all the scenarios. They are all bad."
Looking back ten years on, Tillett said the disaster scenarios have not materialised, though he believes lasting damage has been done to both the economy and the stock market.
GDP growth beat most of the G7
According to Tillett, UK GDP growth averaged 1.5 per cent a year between 2015 and 2025. That figure is low by historical UK standards but would still rank third among G7 advanced economies, behind only Canada and the United States, he said.
On a per capita basis, UK growth averaged 0.8 per cent over the same period, ranking fifth among the G7, according to Tillett.
One prediction that did come true, Tillett said, was from then Bank of England governor Mark Carney, who said "sterling is likely to fall sharply." The pound fell around 15 per cent against the US dollar and has not recovered much since, according to Tillett. He said this shift in the terms of trade helped shield the economy from some negative trade effects of Brexit, but also made the UK poorer relative to the rest of the world.
Large caps have outpaced small caps
Tillett said the most striking feature of the post-Brexit era has been the underperformance of UK smaller companies. Since the eve of the referendum vote, the Deutsche Numis Small Companies index has returned 89 per cent, or 6.6 per cent annualised, he said. The large-cap Bloomberg UK 100 index, by contrast, has returned 143 per cent, or 9.3 per cent annualised.
Tillett attributed part of the gap to fundamentals. Smaller companies tend to be more domestically focused, more cyclical and more sensitive to interest rates, making them more exposed to a volatile macroeconomic backdrop over the past decade, he said. The Bloomberg UK 100 index, in contrast, contains many larger international companies whose earnings benefited from the weaker pound.
Between 2015 and 2025, earnings in the Deutsche Numis Small Companies index grew 5.8 per cent a year, compared with 7.0 per cent for the Bloomberg UK 100 index, Tillett said. He said that gap is meaningful but not enough on its own to explain the full underperformance of smaller UK companies.
Tillett said the defining feature of the post-Brexit UK stock market has been what he calls a "crisis narrative." Even though Brexit itself did not cause an economic crisis and the economy has performed adequately, he said there has been a persistent sense that the country is on the verge of one.
Tillett pointed to a string of headwinds, including strained Brexit negotiations, the leadership of Jeremy Corbyn, the pandemic, the economic policies pursued under former prime minister Liz Truss, the energy and cost of living crisis, and difficult government budgets. Some of these pressures were specific to the UK, he said, while for others that affected other countries too, the UK often fared worse.
Tillett said UK equity funds have seen six consecutive years of outflows since the country left the EU in 2020, totalling more than $160 billion. He said this has put constant downward pressure on UK equity valuations.
In 2015, the Deutsche Numis Smaller Companies index traded on a price-to-earnings multiple of 15 times, compared with 11 times currently based on 2026 consensus estimates, according to Tillett. That amounts to a valuation de-rating of more than 25 per cent, or 2.7 per cent a year, which he described as the single biggest factor behind the underperformance of UK smaller companies.
Smaller companies "primed for profit"
Tillett said the outlook for UK smaller companies today is much better than it was ten years ago, for several reasons.
He said investor expectations have come almost full circle. In 2015, he said, the UK economy was the best performer in the OECD, according to George Osborne at the time. Today, expectations are much lower and valuations reflect that, Tillett said, adding that investing at 11 times earnings is a very different proposition to 15 times. He said the dividend return alone is now over 4 per cent, while the risk of further de-rating is much reduced.
Tillett said the broader economic backdrop, while still challenging, is arguably better than for much of the last decade. He said the disruptions from Brexit are in the past, some political figures are now calling for closer cooperation with the EU, and the UK economy has proven more resilient than many expected.
He also said UK companies are buying back their own shares at a record pace, and many are being acquired by overseas competitors or private equity firms, which he said shows there is capacity to invest for growth if business confidence returns.
Finally, Tillett said the case for UK smaller companies remains strong relative to global markets, where major equity indices are increasingly dominated by a small group of technology and chip companies with high valuations. He said UK smaller companies offer a wide range of industries at valuations that are low both compared with global equities and against their own history, which he said should appeal to investors looking to diversify their equity exposure.
