London’s two main stock indices have now been on a tear for about a year, recouping deep losses from the Brexit vote within a month, and going on to notch a string of new records. The most recent was last week, despite sterling coming under renewed pressure from polls showing the Conservative Party’s out-sized lead dwindling.
Any performance gaps between mid-cap shares and blue chips have been fleeting, as anxieties about the FTSE 250’s bigger exposure to a post-Brexit economy ease. To be sure, economic data have often been ambivalent, but still firm enough to keep investor sentiment upbeat, despite inflationary pressures from weak sterling. And even as these begin to propel the pound higher, the Bank of England’s lack of haste to lift borrowing costs off record lows has also been supportive of shares. Against that advantageous backdrop, the FTSE 250 has outpaced the FTSE 100 so far this year, rising more than 10% up till Friday’s close, against 5% by the flagship index.
Even so, tell-tale signs suggest investors are not entirely sold on the idea that second-tier shares can be just as immune to a potential economic slowdown as blue chips.
For one thing, whilst the FTSE 250 and FTSE 100 posted near-identical gains since 24th June 2016— 23.5% and 22.6% respectively—mid-caps have only been leading since April. That was a step-change month for sterling’s recuperation, with the pound wiping out another 2.4% of Brexit vote losses against the dollar in just a week. Whilst there’s no agreement on the precise relationship between stronger sterling and FTSE 100 exporter revenues, investors have treated the pound’s comeback as a headwind. Yet it is also clear that blue-chip stocks quickly adapt—the FTSE gained 6.8% between mid-April and the beginning of this week. In other words, the FTSE 100’s unease with sterling’s bounce looks temporary.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient.
Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.