FTSE 250 hits 20,000. So, how high will it go? Medium-sized firms still look cheap compared to their larger peers
The FTSE 250 is often dubbed the engine room of Britain – because it contains the manufacturers, retailers and investors that are the lifeblood of the nation.
Yesterday, it passed the landmark 20,000 for the first time ever, finishing up 0.3 per cent at 20,024.92 points.
It’s a far cry from the sell-off in the days following last June’s referendum. The index of medium-sized UK companies tanked 13.7 per cent in its first two sessions after the Brexit vote, in line with a large decline in the value of the pound.
Many worried that the FTSE 250 would continue to struggle because of its high concentration of companies that make their earnings in the UK.
The thinking behind this was that international firms get more for their money when they bring their earnings back to the UK when the pound is weak. So, what has led to such a dramatic turnaround?
Since hitting its lowest post-Brexit level on June 27, the FTSE 250 has returned an impressive 33.8 per cent, helped in part by a strengthening of the pound.
This is even more than the FTSE 100, which has returned 26.8 per cent over the same period.
The FTSE 250 returned to its pre-Brexit value in just over a month when it hit 17,465 on August 5.
With many economists posting an overwhelmingly negative knee-jerk reaction to the vote, Trevor Greetham, head of UK equities at Aviva Investors, says the sell-off was initially emotional.
He argues that the UK was never going to head off a cliff because it went into the vote in a healthy position. Indeed, the FTSE 250 had outperformed for three straight years before the referendum.
Since hitting its lowest post-Brexit level on June 27, the FTSE 250 has returned an impressive 33.8 per cent, helped in part by a strengthening of the pound
‘As time has progressed and resilient data has kept emerging, overly pessimistic forecasts have been upgraded,’ says Greetham.
With three quarters of its earnings coming from overseas, the FTSE 100 is often seen as Brexit’s biggest beneficiary.
But 12 per cent of the FTSE 250’s members generate their revenues mainly in the US, 15 per cent get most of their income in Europe, and 23 per cent have sales largely across the rest of the world.
According to Nathan Sweeney, senior investment manager at Architas, many investors initially ignored this in a state of panic.
He says that after this left the FTSE 250 looking very cheap, a buying frenzy among bargain-hunting investors stoked a rally in the index ,which continues to this day.
So can the bulls continue to drown out the bears?
Indriatti van Hien, deputy fund manager of the Henderson Smaller Companies Investment trust, certainly thinks so.
He says that despite a strong run, UK medium-sized companies still look cheap when compared to their larger peers in the FTSE 100.
But Ben Yearsley, director at Shore Financial Planning, is less convinced by the FTSE 250’s ability to keep growing.
He says: ‘The more the FTSE 250 rises, the more that companies have to produce stellar profit numbers to keep pace, and where are those realistically coming from?’
S O what stocks should investors use to make the most out of the FTSE 250’s rally, while also protecting themselves against the chance it could decline?
Paul Spencer, manager of the Franklin UK Mid Cap fund, says: ‘The UK has an ageing, wealthy population and therefore companies that service this market such as wealth managers, annuity providers, healthcare, and insurance providers are favourable.’
In particular, he recommends wealth manager Rathbones, annuity and equity release providers such as JRP Group, specialist house builders such as McCarthy & Stone and private healthcare providers such as Spire Healthcare.