Smallcaps feel pinch as bailouts hit spending

Central and local government expenditure worth 73 billion pounds to small companies last year, according to the Federation of Small Businesses (FSB), could be at risk as the government looks to reign in public spending in coming years.

Total public spending is currently over 600 billion pounds, but the government has already signalled a proposed slowdown, with real spending rising by just 1.25 percent in 2011/12.

The rate is paltry compared to the past decade, when public sector current expenditure has grown on average by 3.3 percent per annum. Between 2000/01 and 2005/06 it averaged 4.4 percent.

"Government contracts have their worth on two levels: both financially and the reputational aspect of having the contract," said FSB's head of public affairs Stephen Alambritis.

"If those dry up, to try to clamber back on to a public procurement listing is going to be very difficult for small businesses as we come into recovery," he said.

Investors' concerns are reflected in the valuation of Britain's small-cap stock index, which has been hit hard in the current recession.

The FTSE Small cap index nearly halved in value last year, is down by more than 12 percent so far in 2009, and the outlook remains tough.

"Our view is that small/mid-caps should underperform large-caps in the early stages of a recovery," said Eduardo Lecubarri, head of Small/Mid-Cap Strategy at JP Morgan.

"As we come into recovery the larger businesses will be better prepared... they have the resources to win over buyers with cheaper bids," said Alambritis.