Is the FTSE 250’s run at an end?

London’s FTSE 250 mid-cap index has outperformed the blue-chip FTSE 100 for the past nine years, but one potential impact of Brexit could be a reversal of this trend. 

London Stock Exchange
Source: Bloomberg

The FTSE 250 index of mid-cap stocks listed on the London Stock Exchange has had a fantastic run, outperforming the FTSE 100 index of the largest stocks since the financial crisis. Since the UK voted to leave the European Union the FTSE 250 has underperformed, and that’s a situation that’s likely to continue until we know more about the longer-term prospects for the UK economy.

FTSE 100 v FTSE 250

The FTSE 250 has delivered a total return of 12.9% with dividends reinvested since the start of 2009, compared with a return of 5.9% for the FTSE 100. Since Friday morning, the FTSE 250 has declined 9.0% compared with a 0.9% decline for the FTSE 100.

The reason for the relative performance differences between the two indices is down to the stocks that make them up. There are proportionally more companies in the FTSE 100 with an international focus, earning more of their profits and revenues outside the UK, than there are in the FTSE 250 which largely comprises of British manufacturers, retailers and service companies seen at more risk in the event of a UK economic downturn.

In recent years, the fall in commodity prices has weighed on the FTSE 100 more than the FTSE 250 because it contains international giants like Rio Tinto, BHP Billiton, Royal Dutch Shell, BP, Glencore and Anglo American. Despite that pressure, stock indices including the FTSE 100 have risen globally amid a strong equities recovery in the wake of the financial crisis. But the FTSE 250 has done better than the FTSE 100, partly because the UK economy has been one of the strongest performers in the developed world and hasn’t felt the direct impact of the commodity price pressure to the same extent.

Brexit has put serious pressure on the UK economy, for the short-to-medium-term at least, and so investors are concerned that more of the companies in the FTSE 250 will be hurt than in the FTSE 100. Large companies aren’t immune, and we’ve already seen airlines like easyJet and International Consolidated Airlines Group warn of the impact of Brexit. But large companies can also better adapt to the new situation, as we’ve seen with Vodafone’s declaration that it’s making contingency plans for moving its headquarters abroad, given that only 11% of group profits come from the UK. Companies in the FTSE 250 can’t simply move abroad when their client base is in the British Isles.

The weak pound is another problem for many FTSE 250 companies, particularly retailers which buy stock in dollars and then sell products in sterling. The drop in the pound may actually provide a boost to some FTSE 100 companies, as revenues earned abroad are worth more when they’re translated back to sterling for reporting purposes.

The FTSE 250 has been in a steady uptrend since the first quarter of 2009; having hit 6000 during the financial crisis, it began to build base around this level, and since then has surged to a high of 18,000. However, if it closes below 16,300 in June (as looks very likely with June ticking away rapidly), then it would be the first time that it has closed below its rising trendline. Combine that with a descending trendline off its all-time highs and it becomes easy to see why the index may continue to fall. A break below 15,000 would then mean the next real area of support on the long-term chart is the 2014 low around 14,200. 

FTSE 250

By contrast, the FTSE 100 lost its own rising trendline way back in the first half of 2015, with an attempt to break the downtrend off its own 2015 high failing earlier this month. The 6000 mark and then 5900 are the big levels to watch on the downside, with the prevalence of long-wicked candles showing a real desire among investors to prevent significant falls. A weakening pound could be just the fundamental catalyst this market needs to break its current downtrend and try for a rally above 6500 and then on to 7000.

FTSE 100

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