Finding opportunities in UK mid-caps

Finding opportunities in UK mid-caps

Where do you find opportunities in a highly concentrated and expensive market? Despite a sharp drop starting in late February 2026, the MSCI World Index is still up appreciably from the lows of March 2025. Equities offer one of the best defences in a higher inflation environment, but starting valuations matter to the long-term outcomes investors achieve.

Small and mid-cap shares often offer attractive opportunities
PSG Asset Management’s proven 3M investment process leads us to shop in uncrowded areas of the market. We believe we are more likely to find ‘bargains’ in these less popular areas where fewer investors spend the time doing in-depth research. However, finding assets at a good price is only the starting point of our investment journey. We are also looking for some inherent quality that the market is missing, and aim to find above-average quality trading at below-average prices. We believe this lays the bedrock for a very good risk-adjusted process, with the ability to deliver exceptional returns to investors in the long run.

Small and mid-cap shares often ‘fit the bill’ as uncrowded and ‘neglected’ areas, and we have a long track record of successfully investing in this space, particularly in South Africa. There are a few reasons why this area of the market is typically overlooked. Larger investment managers typically do not consider these companies, as they cannot take a sufficiently large position in such companies to ‘move the needle’ in terms of performance in larger portfolios. There are also fewer sell-side analysts that cover these areas. In our view, however, this provides fertile ground for doing our own proprietary research, and there are rich rewards for doing so. Many mid-cap companies are high quality and have long track records, while also offering the ability to compound at a faster rate than the average company for many years, given their size. Capitec is a good example of the kind of success that can be achieved from investing in this area. In 2011, the company had a market capitalisation of R14bn and was certainly not on most large investors’ radar screens. Over the following 15 years, the share price compounded at an annualised rate of 26%, and Capitec now has a market capitalisation of R470bn.

Why UK mid-caps currently offer attractive opportunities
The UK market has experienced something of a perfect storm over the past few years. A cost-of-living crisis has driven down disposable income while pushing up central bank and government bond interest rates. This has slowed down the economy and dented consumer income, resulting in an underperforming stock market. Political disarray has also led us to draw some parallels with where South Africa was a few years ago. The combination of all these uncertainties and fears has created excellent opportunities to find above-average quality trading at below-average prices, which are currently being overlooked by the broader market.

Global opportunities: UK mid-caps
Price-to-book ratio
Sources: PSG Asset Management and Bloomberg. Basket of underlying shares owned in UK mid- and small caps

Some of the names that have been added to our portfolios after screening well in terms of our 3M process include:

• High-quality global reinsurance company Hiscox, which is based in London. The company has an expected payout yield of around 7% in 2026, double-digit consensus earnings growth over the next three years and a low correlation with the economic cycle.
• Real estate investment trust (REIT) Hammerson, which invests in UK shopping centres. Hammerson has slimmed down into the best located, dominant retail assets in the UK and Ireland (and some excellent French ones), with few new shopping centres being built in their regions. Added attractions are a strong balance sheet and an attractive dividend yield of 6%.
• Associated British Food (ABF), which owns the excellent value retailer Primark and has interests in various sugar and grocery businesses. We believe earnings are low and the starting P/E valuation is on an undemanding 11x, a significant discount to its long-run average.

There are many opportunities that will reward patient investors
We believe focusing on the overlooked and unpopular areas of the market offers a disproportionate likelihood of rewarding investors in the long run, and we are currently finding many attractive opportunities that fit the bill in UK mid-caps. Moreover, our ability and willingness to invest in this sector of the market, supported by our in-depth research process, sets us apart from larger competitors in particular. In a highly concentrated market where large segments are still trading at rich valuations despite recent market instability, we believe this offers a unique advantage to our clients.

Greg Hopkins is the Deputy-Chief Investment Officer at PSG Asset Management.