Next year is set to be a lot more volatile for markets, according to Gervais Williams, manager of the Diverse Income Trust at Premier Miton Investors.
In a commentary note, Williams said 2024 has been ‘a relatively good year’ for investors with steadily rising share prices, but we should not count on that continuing in 2025.
He made the argument that this volatility could create opportunities at the lower end of the market cap scale in the UK.
“One of the features about asset markets is that they can be very spikey, especially at times of significant economic and political change,” he said.
“Specifically, there is a risk that quite a few large caps won’t be able to dodge the radically changing economic and political bullets.
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“Clearly, quite a few small caps might get caught out as well. But there will be others that don’t just survive better but also happen to be in exactly the right place at the right time and deliver quite exceptional returns.”
Williams warned that macroeconomic headwinds may bring dangers, as well as opportunities for investors.
“Furthermore, if bond yields remained elevated, and there were to be a global recession, then various private businesses might become insolvent in significant numbers. Numerous zombie companies would fail as well.
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“At times like this, there is scope for well-financed businesses to accelerate their growth, as they expand into the vacated markets,” he continued.
“Or better still, buy an overleveraged but otherwise viable business, debt-free from the receiver for a nominal sum – sometimes as low as £1. These kinds of acquisitions can sometimes deliver transformational returns for quoted small caps.”
Williams concluded that “for the first time since 2015” he believes 2025 will be defined by small cap outperformance, with current low valuations meaning greater upside potential than other assets.
