UK stocks are severely lagging their American counterparts as concerns about the British economy continue. The mid-cap FTSE 250 index has slipped by 5% this year while the blue-chip FTSE 100 index has dropped by almost 3%.
In contrast, American indices like the Dow Jones, Nasdaq 100, and the S&P 500 indices have surged by double digits. While most European indices like the DAX index, CAC 40, and FTSE MIB started the year well, they have lost their momentum recently.
A key observation is that blue-chip stocks are doing better than the smaller one. In the United States, the Russell 2000 index, which tracks smaller publicly listed companies, has dropped by over 4%.
There are several reasons why the FTSE 250 index is lagging the FTSE 100. First, small and unprofitable companies are usually at a bigger risk in periods of high-interest rates. For one, these firms are now paying higher rates since most of them use bank loans to finance their activities.
They also tend to have less money in their balance sheet. Companies like BP (LON:BP), Shell (LON:RDSa), and AstraZeneca (NASDAQ:AZN) have billions of pounds in their balance sheet. As a result, while they are paying higher interest for their loans, they are also benefiting from interest income.
For example, in the most recent quarter, Shell spent 894 million pounds in interest payments and made 488 million pounds in interest income.
The same situation is happening in the US, where mega-cap companies like Meta Platforms, Berkshire Hathaway (NYSE:BRKa), Apple (NASDAQ:AAPL), and Microsoft (NASDAQ:MSFT) are making a fortune as interest rates jump. Meta Platforms has over $61 billion in cash while Apple and Microsoft have $61 billion and $143 billion, respectively.
UK stocks are also going through a rough patch for other reasons. Inflation remains above 6% while the country is going through stagflation. Brexit is also a major thorn in the flesh and is causing margin challenges.
Most FTSE 250 constituents have been in the red this year. The worst-performing companies in the index are Synthomer (LON:SYNTS), Spirent, Mobico, Ferrexpo (LON:FXPO), and Capricorn Energy (LON:CNE). All these shares have crashed by over 50%.
The top performers in the FTSE 250 index are Restaurant Group, Marks & Spencer, FirstGroup (LON:FGP), Mitchell & Butlers and JD Weatherspoon.
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