The FTSE250 is trading at the start of 2024 more or less where it was at the beginning of 2023. Opening on 4th January 2023 at 19,391 points and opened today (4th January 2024) at 19,362 points, down 0.1%. Although not much happened last year, 2024 could be a take-off year for the UK mid-cap market.
The FTSE250 Index is a weighted index of the 101st to 350th largest stocks on the London Stock Exchange that covers companies between the large cap FTSE100 and smaller capitalisation companies. Established in 1992 at a base point of 2,403 the FTSE250 has a current total market capitalisation of around GBP300bn, and the highest value it had was 24,250 points, at the beginning of September 2021.
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In its history, the FTSE250 has had eight negative years since 1992 and has tracked the wider performance of the economy. However, in the years following the index’s fallbacks, the FTSE250 has roared back strongly. After the disruptions of Coronavirus in 2020, the index fell on a Total Return basis by -4.6%, but the following year put on 16.9%. Following the Global Financial Crisis of 2008, the FTSE250 was down -40.3%. The following year the index returned 46.3%. Going back to the fall-out of the Millenium dot-com boom, the FTSE250 was down -27.3% in 2002. In 2003 the index returned 34.4%.
The FTSE250 is a more growth-orientated index than its peer the FTSE100 and is a better reflection of the health of the UK economy than the large-cap index, given the Footsie is dominated by multinational corporations. Historically, the FTSE250 does well when interest rates start to come down, and given that 2023 was probably the peak of interest rates with the City expecting as many as 0.25% cuts, taking the Bank of England’s base rate from 5.25% to about 3.75% by the end of this year, if the FTSE250 follows what it has done in the past, it is set for a good year.
FTSE250 has a domestic focus
The rationale for this is that the constituents of the FTSE250 – being more domestically-focussed and having less choice to borrow internationally than the multinationals – are more sensitive to UK interest rates than their larger brethren, and in more need of debt to fund growth than larger cap corporations.
Historically FTSE250 companies borrow-more as interest rates fall and then invest that money into growing their businesses, increasing revenues and profits. Moreover, the FTSE250 has a notable exposure to interest-rate sensitive sectors like housebuilders and real estate companies and the general economic pessimism has seen executives stay their hands over the M&A button until the general climate looks a bit sunnier – M&A is an area that mid-caps have traditionally used to grow market share.
Goldman Sachs concurs that 2024 could be a good year for the FTSE250 – notwithstanding macro shocks like a significant uptick in the conflict in the Middle East and election-led instability in the UK and US – and sees the FTSE250 as an attractive investment destination in the medium-term. Consensus forecasts a 7% sales growth and a 15% EPS growth in 2025 for the FTSE 250, compared to 1% and 7% for the FTSE 100.
The index looks historically cheap
The UK market is at the present time historically cheap – a hangover of the Brexit Blues – but eight years on from the referendum vote, eventually most of the wreckage has been cleared out of the way. The FTSE100, as reported, is seen as a reflection of a bygone age, dominated by ‘old economy’ stocks like mining companies, banks and insurance companies, which the trendy new global money isn’t attracted to. However, the FTSE250 is a much broader index, and at current prices is a great value option and offers a plethora of undervalued, unloved, but solid companies with great prospects.
You can access the FTSE250 by buying individual stocks, but that has its risks. Alternatively, you can gain exposure to the index through a cheap tracker or Exchange Traded Fund which will track the performance of the index at a relatively low cost with the added benefit of paying dividends. This means that investors will enjoy the effects of compounding over the longer term. For short term exposure to the FTSE 250, traders can use Contracts for Difference or CFDs to track the index. CFDs provide an opportunity for traders to make trades on a rising or falling index. UK investors may prefer to trade with a spread betting provider where any gains are tax free.
Being smaller and less internationally diversified than the Footsie stalwarts makes this index more risky, but the companies that you are dealing with aren’t Mom and Pop popup stores, they are significant entities with an average market cap of around GBP5bn, where you can find rapidly growing companies that have already traversed the riskiest parts of their expansions. This looks an opportunity too good to miss.
