INVESTORS are sending stock prices for small UK companies to the highest levels in two decades relative to bigger ones on speculation that their earnings will grow faster as the economy recovers.
Bloomberg calculations have compared the FTSE 100 Index of the UK's largest companies by market value to the FTSE Small Capitalisation Index of smaller stocks, normalised to 100 as of December 31, 2008. The ratio between the two gauges is at the highest level in more than 24 years. The small-caps index has surged 177pc from its low in March 2009, beating the FTSE 100's 86pc gain.
"The domestic UK economy is booming, and people expect interest rates will stay low," said Gerard Lane, a strategist at Shore Capital in Liverpool, England. "The small and mid caps in the UK will be the biggest beneficiaries."
The UK economy will expand 2.6pc in 2014, according to the median economist forecast in a Bloomberg survey. That would be the fastest pace since 2007.
Earnings at companies in the index of smaller stocks will jump to 278.4 pence a share this year from a loss of 137.6 pence in 2013, the average of analysts' estimate shows. That compares with a 30pc increase to 506.3 pence for the FTSE 100. (Bloomberg)