As 2025 unfolds, UK mid-cap companies are navigating the impact of recent elections at home and abroad. In the US, fears of higher tariffs under Trump’s presidency have raised concerns about inflation and slower global growth. Domestically, the new government’s first budget introduced additional costs for businesses, including higher National Insurance and an increased national living wage. These changes have unsettled both the economy and markets, affecting business and consumer confidence.
Yet, this period of negativity may lead to opportunities for long-term investors. A softer global economy could ease inflationary pressures, paving the way for interest rate cuts. Historically, UK mid-caps have outperformed following such cuts, as illustrated below.
Source: Bloomberg, 1 April 2024. Time period: 1990 – 2023. Past performance is not an indicator or a guarantee of future results.
Despite prevailing pessimism, with growth slowing and near-term forecast downgrades, we believe the UK economy is more resilient than many assume. Once inflation stabilises, growth prospects should improve.
From a market perspective, uncertainty has weighed heavily on the domestically focused FTSE 250 index, especially in consumer-driven sectors like housebuilding and retail. However, the UK consumer, accounting for 60% of GDP, remains a key economic driver. While confidence has softened, key fundamentals stay strong - private sector wage growth continues to outpace inflation, and the recent national living wage increase will boost disposable incomes. Additionally, UK households hold £350 billion in savings, which could support demand as interest rates ease and saving becomes less attractive.
You don’t need to look very far to be confronted with negative headlines and stories of broken Britain. But, maybe it’s time to change the narrative, take a closer look and discover the real story on UK equities.
This consumer resilience presents opportunities within UK mid-caps. Many high-quality British companies that navigated the turbulence of the pandemic and cost-of-living crisis have emerged stronger. For example, Cranswick, a leading food producer, has grown turnover and profits by 50% over five years, demonstrating robust leadership and operational agility.
These companies aren’t just weathering challenges - they’re positioning for future growth. With experienced management, solid balance sheets, and strong market positions, UK mid-caps are well placed to benefit from economic recovery.
Despite hosting exceptional companies, UK equity markets trade at a persistent discount to global peers, presenting an attractive entry point. The UK mid-cap index currently trades at 11 times forward P/E for 2025 - a 20% discount to its long-term average of 14 times.
Moreover, UK mid-caps offer surprisingly strong dividend yields - averaging nearly 4%, on par with the FTSE 100. This reflects healthy cashflows, disciplined balance sheets, and capital return strategies such as share buybacks, all of which enhance their investment appeal.
Looking ahead, a shift in sentiment could act as a catalyst for UK mid-caps. A pro-growth, pro-business agenda could restore confidence, attracting both domestic and international investors. With attractive valuations and resilient fundamentals, UK mid-caps are well-positioned to benefit.
For investors, this may be the time to look beyond the near-term uncertainty. As history has shown, periods of undervaluation can offer compelling opportunities. With the right conditions in place, UK mid-caps could be poised for a meaningful recovery.
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