It is 23 years since Sex and the City’s Carrie Bradshaw reprimanded one of her fellow singletons for remarking that ‘women just want to be rescued’. ‘Honey,’ she said, ‘did you ever think that maybe we’re the white knights and we’re the ones that have to save ourselves?’

The line ranks among the most celebrated in the show’s history, but I mention it here because a similarly indignant response is currently unfolding in the UK smaller companies sector.

Investor sentiment towards the UK as a whole has been poor for some time. Even a better-than-feared economic backdrop has done little to improve it. UK equities remain undervalued relative to their global peers, and UK smaller companies remain undervalued relative to the broader domestic market.

This makes for a demoralising status quo – and many smaller companies have finally had enough. Like Carrie before them (pictured below), they have grown tired of a disheartening, defeatist narrative and have decided they could well be their own best saviours.

There are several ways in which these businesses are riding to their own rescue. Before examining them, let’s first take a closer look at why so many companies now feel compelled to take matters into their own hands.

A barrier to growth

Regardless of whether they are justified, low share prices have real-world consequences. Particularly for smaller companies, one of the most serious impacts is the stifling of growth opportunities.

Imagine, for instance, that a business needs to issue equity to fund an acquisition. Traditionally, its equity should be worth at least the same as that of the firm it wants to buy – a big and often impossible ask when valuations have fallen so low.

By the same token, undervalued companies are more open to acquisition themselves. They may be especially easy prey for overseas competitors. Along with the uncertainty it generates, this vulnerability can distract management and hamper the hiring and retention of top-class employees.

Long-term incentive plans can also be derailed, further undermining a business’s ability to keep hold of its staff. Without a suitably appealing ‘carrot’ for meeting targets, a workforce can become demotivated and less productive.

Taken together, issues like these are likely to translate into a self-perpetuating downward spiral. Undervalued companies become even less attractive – and the agonising wait for a white knight goes on.

Escape routes from a vicious circle

One way in which UK smaller companies are looking to escape this debilitating cycle is by buying back their own shares. Many businesses have good balance-sheet capacity – often as a result of saving money during the pandemic – which allows them to make ad hoc buyback announcements.

Recent examples include mobility solutions provider Redde Northgate (REDD) and mobile payments specialist Boku (BOKU), both of which we hold. Looking beyond our own portfolios, Chemring (CHG) – a technology company that supplies the aerospace, defence and security industries – notably boosted its share price by announcing a £50m buyback at the start of August.

Another option is to engineer a buyout by private equity. Professional services group K3 Capital (K3C), which we previously held, took this route last year after concluding its unduly low valuation was consistently holding back its ‘buy-and-build’ strategy.

There are also more radical courses of action, such as relisting overseas or even delisting. IP commercialisation firm Allied Minds (ALM) opted for the latter last November, removing itself from the London Stock Exchange and so avoiding the costs of being publicly listed.

As these various roads to salvation become more travelled, companies’ frustration is growing increasingly apparent. Crucially, so is their unwillingness to sit around and twiddle their thumbs until investor sentiment at last turns.

A disconnect that cannot last

So where is all this likely to lead? My Sex and the City parallel arguably unravels at this point, since whether Carrie stayed true to the outburst I referred to is a matter of fierce debate among the series’ devotees.

To wit: she married her long-time on-off love interest in the franchise’s first movie spinoff. He then died after a workout on an exercise bike in episode one of the 2022 reboot. His death famously wiped more than 11% off Peloton’s share price, but that is another investment story for another time.

Maybe the real point here is that Carrie’s quest for a meaningful relationship could not go unfulfilled forever. Analogously, the disconnect between the low valuations and resilient fundamentals of UK smaller companies cannot endure in perpetuity.

Shifts in sentiment can happen quickly, not least if they are driven by retail investors. This alone means the attractions of these persistently unloved stocks could regain wider recognition in the near future. In the meantime, though, boards and senior managers are leading the charge themselves.

By acting as their own white knights, many of these businesses are helping lay the foundations for a long-deserved turnaround. One way or another, UK smaller companies – in tandem with the rest of what is still the world’s fifth-largest economy – should soon get the attention they deserve. 

Laura Foll is co-manager of Henderson Opportunities Trust (HOT ), Lowland Investment Company (LWI ), Law Debenture (LWDB ) and Janus Henderson UK Equity Income & Growth .

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