Why UK mid-caps could be the next big recovery story

It is now six months since Donald Trump decided to scare the life out of markets with Liberation Day. Many of you will remember the now infamous bingo board in early April this year, which presented tariffs for each country doing business with the US. The tariffs were well scouted – it was the size of them which spooked markets.

But volatility also brings opportunities – the old saying “it pays to ride out storms” never rang more true – with markets now up 26% in the past six months*.

Read more: Six months on: the real impact of Trump’s trade war

We are now at all-time highs in many markets across the globe – not least in the UK where the FTSE 100 is trading just shy of 9,500. The US is also at record highs.

For those who are nervous about the markets being at record highs we would point out that this is nothing new. Take the US market as an example, of the 1,187 months since January 1926, the market was at an all-time high in 363 of them, 31% of the time. And, on average, 12-month returns following an all-time high being hit have been better than at other times: 10.4% ahead of inflation compared with 8.8% when the market wasn’t at a high. The market can push on from this point**.

The unloved UK mid-caps

But there is still value in some segments of the market. Not least in the UK, where the FTSE 250 remains significantly cheap compared with other markets and its own history. With more of a domestic bias (its domestic and international revenues are more 50/50% than 80/20% in favour of the international side for the FTSE 100) – these mid-caps have faced one problem after another in the past five years.

They were in the eye of the storm during Covid – the likes of airlines, travel companies, restaurants and pub chains. More recently they have had to tackle a difficult domestic economy, rising rates and geopolitical challenges. This year has been far from straightforward for these companies, amid fears of higher tariffs, inflation and slower growth. We’ve also seen the new government’s first budget introduce additional costs, like higher National Insurance and an increased living wage.

But there are reasons to suggest this could be a good time for investors to strike. Right now the FTSE 250 index is carrying a forward dividend yield of 3.41%, higher than the FTSE 100 (3.15%) an extremely rare occurrence***. The index is also trading on a forward one year P/E of just 11.7X – a significant discount to its long-term average of 14X. Historically, the FTSE 250 has outperformed the FTSE 100 in periods of strong economic growth, reflecting its greater exposure to the domestic UK economy.

Many fund managers we speak to believe we have reached a point where things simply have to change. On the one hand things cannot get any worse for these stocks, with valuations trading at the bottom end across this segment for a prolonged period of time. Over 50% of stocks in the sector are buying their shares back – indicating not only do many of these companies believe their shares are simply too cheap, but also that many companies have the liquidity and ability to grow from here.

However, if things do not improve – we can expect to see the likes of corporate and private equity buyers increase their focus on this market.

In our recent podcast, Simon Murphy, manager of the VT Tyndall Unconstrained UK Income fund, explains that perception of the UK market doesn’t tell the full story. Simon discusses the surprising strength of the FTSE, the undervalued potential of mid and small-cap companies, and why he believes the UK economy is far more resilient than many assume.

With a crescendo of negativity around UK mid-caps, we thought we’d look at four stocks our Elite rated managers are currently holding in their portfolios.

GB Group — AXA Framlington UK Mid Cap

AXA Framlington UK Mid Cap manager Chris St John says the FTSE 250 market is now well-positioned to provide a total shareholder return of over 12% over the next 12 months, even if the index does not rerate.

He cites GB Group, which specialises in identity verification, fraud prevention, and location intelligence, serving global clients across finance, gaming, and e-commerce. Market drivers include rising digital fraud and regulatory compliance needs.

He says: “GBG has underperformed its potential over the recent past but under a relatively new CEO the business is undergoing product and operational simplification which should clarify the business case for its products in both the minds of its own strengthened salesforce and customer base.

“In a world where ‘AI Agents’ are proliferating; trust and rising fraud will continue to be drivers. Trading on a FY2026 P/E of 12x and a free cashflow yield of 8%, suggests this business is ex-growth and strategically challenged. If management can prove this is not the case and revenue growth can accelerate, equity returns available could be significant.”

Bloomsbury Publishing — WS Montanaro UK Income

Bloomsbury Publishing has both the mainstream line (the likes of Harry Potter and author Sarah J. Mass) as well as an academic arm. WS Montanaro UK Income manager Guido Dacie-Lombardo says the latter has been hit by Trump policies around academia in the US, causing business to be a bit sluggish. While this may not turnaround instantly, he says Bloomsbury remain well positioned and are looking at licensing all their academic text to large language models, which will give them greater margins.

Speaking in July, he said: “Although there is some disappointment that Sarah J. Mass has yet to finish her latest book, which is a big growth driver for Bloomsbury publishing, it will eventually come through. HBO is also making the new Harry Potter series coming out in 2026 – which will bring a new generation of people into the books.

“The business is a great example of looking through short-term cyclicality to a solid, long-term business, with strong indicators for the next 18 months.”

Alexandra Jackson, manager of the Rathbone UK Opportunities fund, told us more about Bloomsbury on the Investing on the go podcast back in January.

QinetiQ — Schroder Income Growth

This British company operates primarily in the defence, security and critical national infrastructure markets and run testing and evaluation capabilities for air, land, sea and target systems.

Schroder Income Growth manager Sue Noffke says the business was a strong contributor in the second quarter of this year. She says: “QinetiQ was positive as its share price recovered after its announcement in March of a profit setback arising from uncertainty around its US business together with delays ahead of the UK Government’s Strategic Defence Review (SDR). We saw that the group has a strong balance sheet and cash generation, is conducting a share buyback and is well positioned to benefit from Europe’s growing defence spend. These broader attributes have since been recognised making QinetiQ a leading contributor to our performance this quarter.”

SSP — Allianz UK Listed Opportunities

SSP is the number two global food and drink provider in airports. Allianz UK Listed Opportunities manager Richard Knight says this is a low competitive intensity industry, with airports consolidating in this market. He says while airlines slash pricing of plane tickets if volumes fall 1%, the same does not apply for food & drink at airports.

He says: “This is a defensive business which is growing about 25% this year, probably grows 20% next year and had a pre-pandemic P/E of 20-25x (it has a current forward P/E of 13.5x). A few months ago they listed their Indian business in India (20% of their business is the same thing in India). The business trades on five-times the valuation of SSP Group in the UK.

“If you just took that value of the Indian business and applied it to the rest of SSP’s business – it is trading on just 6x earnings – which is a distressed multiple. The value is there in the business and no one is paying attention in the UK.”

*Source: FE Analytics, total returns in pounds sterling, 9 April 2025 to 3 October 2025

**Source: Schroders, 21 July 2025

***Source: Dividend data, updated 3 October 2025