The sentiment for UK equities seems to be shifting. Gains have been concentrated in the FTSE 100 over the last 18 months, and there are reasons to believe that the positive sentiment could be heading down the market capitalisation scale in the near future. Chris St John, UK equities portfolio manager at BNP Paribas Asset Management, outlines the areas of the market that could benefit most from the improving market backdrop.
While the large global companies that dominate the FTSE 100 have been on an improving trajectory, medium-sized and smaller UK companies have lagged behind. There has been a significant divergence between the FTSE 100, which is up 25.8%, and the FTSE 250 ex-IT, up only 12.5% in 2025, highlighting differing market dynamics1.
There are a few reasons behind this divergence. While the FTSE 100 is dominated by large global companies, smaller companies are far more reliant on a wider range of thematic drivers, including the UK domestic environment.
Recent data suggests the UK backdrop could be changing, and this could drive a narrowing in this performance differential. The UK Composite PMI has accelerated and beaten expectations, and retail sales are up 5.5% compared to last year2. Meanwhile, data from the Bank of England shows that household savings have outpaced debt, which indicates that UK consumers still have the capacity to spend.
UK PMIs are improving…
… and consumers are in good shape
Changing markets mean changing focus
Since the start of the year, a global wave of volatility caused by the growing capabilities of AI has shifted investor focus on risks in what were previously considered unassailable sectors. And more recently, renewed conflict in the Middle East has put the inflationary picture and the trajectory of interest rates into question.
As we consider market reaction to these events, we have been reviewing the opportunities in the UK small and mid-cap equity space. We see five interesting themes emerging where there is potential for outperformance.
- Growing Demand For Resources
Global demand for resources remains robust. Demand for copper, for example, is projected to reach 35.1 million tonnes by 2030, growing at around 3.8% annually3 Geopolitical tensions and the expansion of the money supply have also increased interest in gold as a safe haven. The FTSE 100 has benefited from its heavy weighting to mining and energy, but resource exposure is now becoming more prominent among small and medium-sized firms.
One notable example is Atalaya Mining, a well-capitalized European copper producer with strong growth prospects. Meanwhile, Greatland Gold, listed in the UK and based in Australia, made a significant move in Autumn 2024 by acquiring assets from Newmont. This acquisition has propelled Greatland into the ranks of leading gold and copper producers, positioning it well for future growth.
- AI enablers
While the UK isn’t a hotbed of pure AI development, it hosts a number of companies that provide essential hardware and infrastructure supporting AI growth. Hill & Smith, for example, supplies engineering services that improve the resilience of electrical grids, while Volex manufactures high-speed connectors used in cloud and AI data centres.
- Information, Not Data
We swim in oceans of data, but the real value today lies in transforming raw data into information. We see this in companies embedding AI into their products to unlock new capabilities. Manufacturers like IMI, for example, are integrating AI in their products to reduce energy consumption in agriculture. In mining, Weir Group has added AI and cloud-based learning systems to optimize its customers’ operations and improve efficiency, and Rotork similarly incorporates predictive maintenance technology into its actuators, enabling industrial clients to monitor wear and prevent costly downtime through early intervention.
- The Strong Getting Stronger
Market leaders with established positions are using technology and innovation to further strengthen their market share. Currys, despite industry challenges, has used its expertise in consumer electronics to diversify into providing IT setup and supply services for small businesses, for example, deepening customer relationships and expanding its revenue streams. Funding Circle, a digital lender, has used its superior risk analytics and efficient platform to scale its capital-light lending model, allowing for continued growth. Meanwhile, DFS has used its large market presence to facilitate collaborations with designers, creating distinctive products that now account for around 40% of its sales.
- The Duration Dividend
Long-term, stable cash flows are attractive to investors, and changes in global alliances and the desire for European independence from US military reliance are creating new opportunities in the UK small and mid-cap space. Goodwin, with its expertise in producing HY80 alloys used in military hardware, exemplifies this, with long-term contracts to support defence applications worldwide. Babcock is a company that processes operational data from military and industrial systems and has contracts extending into the 2050s to support the UK nuclear submarine deterrent, providing remarkable long-term earnings visibility. And Chemring, which manufactures military and energic components, has utilised its sophisticated data and information systems to meet quality standards and secure long-term government contracts.
The UK mid-cap and smaller companies market presents a compelling landscape of opportunity rooted in the themes of resource demand, technological infrastructure, information advantage, market leadership, and long-term defence contracts. Despite the risks – particularly around recent geopolitical shocks and the disruptive potential of AI – these themes point to the potential for improving returns.
[1] GlobalData, Global Copper Mining to 2030 Report, 2024.
[2] Bloomberg, as at 31 December 2025.
[3] Bloomberg, 31 January 2026.
