In the fallout from last year’s Brexit vote, investors have been feverishly following stock indices in order to gauge the strength of the UK investment market. But are these indices still a reliable indicator? In this head-to-head, Citywire writer Brean Horne claims that stock indices can be a lousy way of measuring the economy, while BlackRock’s Roland Arnold build’s on this, arguing that active investors should focus instead on individual companies when thinking about investing.
Citywire’s view by Brean Horne…
Fortune has favoured the largest since the Brexit referendum with the FTSE 100 index outpacing its FTSE-250 mid-cap counterpart. But could things be about to change?
Brexit catalysed an epidemic of uncertainty which plagued investor sentiment about the UK economy, briefly but shockingly. Packed with builders, makers and property companies and more domestically focused than the FTSE 100, the 250 index plunged 13.3% in the first two trading days after the vote.
While the 250 has actually outperformed the 100 since those few brutal days, it is up 8.8% since the eve of the vote versus 16.3% for the FTSE 100. The major index, where companies get around 80% of earnings from overseas, has basked in sterling’s Brexit-induced misery and created a haven of rising dividends for investors.
But the FTSE 100’s rise has also pushed valuations to lofty heights with the index’s historic price-earnings ratio now 26.1 versus 14.25 for the 250 index. This has not gone unnoticed and so far this year the 250 index is up 2.8% compared with 1.4% for the 100 index.
‘The FTSE 250 hasn’t been the doom and gloom disaster as predicted,’ says Graham Spooner, investment research analyst at The Share Centre. ‘There are a number of sectors within the index such as manufacturing, construction and packaging which are proving robust and will most likely continue to generate returns. I think this will eventually lead to the valuation gap between the indexes closing.’
Official figures show both UK manufacturing and construction ended 2016 on a strong note, surpassing expectations by growing 2.1% and 1.8% respectively in December over the previous month.
Although traditionally seen as a more UK-focused measure than the FTSE 100, FTSE 250 companies still get half their revenues from overseas, giving mid-cap investors a decent hedge against any ongoing weakness in sterling.
In fact, the purest indicator of the health of the UK market may no longer be the FTSE 250. The FTSE UK Local index may be a more appropriate measure, covering companies which generate at least 70% of their revenues domestically.
This index is still 2.2% below its pre-Brexit levels. As we continue to observe the impact of Brexit on the UK economy, investors may need to look outside of the FTSE 250 for an accurate impression.
Here’s the view from BlackRock’s Roland Arnold…
Brexit is just the latest in a long line of economic or political events that have caused rapid corrections in the market, and like those that came before whether it be Black Monday, the Dotcom crash, the Global Financial Crisis or the Greek Crisis, this one will present opportunities.
Whilst there has been a degree of recovery in the Mid-Cap market, the FTSE 100 has benefited from a winning combination of reflation and renewed global economic confidence boosting banks and resources stocks, with a sumptuous overlay from the mighty Greenback, whereas worries about the domestic economy, although less pressing than they were on the 24th of June, are still weighing on the Mid-Cap.
But surely we should think about the market as more than just FTSE 100 and FTSE Mid-Cap, a boundary which after all is only struck at 100 for simplicity. Why not FTSE 20 or FTSE 50 or FTSE 173, all would serve the same purpose, an arbitrary distinction between what we should consider “large” or “mid”. What is of far more importance to the discussion is the companies that lie beneath the badges, the business that are rolling up their metaphorical sleeves and just getting on with it. The joy of investing in smaller companies is the variety that is on offer, the chance to participate in the journey of market leading, focused, and well managed businesses in a multitude of sectors; healthcare, manufacturing, construction, support services or technology.
Brexit is here to stay, negotiations will start with Article 50, and will continue for some time (probably feeling like forever when we are in the midst of them), with rumour and counter rumour providing plenty of fodder for the waiting political and popular press, all of which will present opportunities for investors.
UK PLC will find a way to take advantage, to adapt, to prosecute opportunities wherever they be, domestically or internationally. Do you need pharmaceuticals to treat your sick dog, tools to drill your shale well, premium tonic to go with your gin, advice on your SIPP, software to protect your email server from prying eyes, or materials to build a road (or wall) then UK PLC can help you.
The UK stock market is home to a whole host of dynamic management teams adept at steering their businesses through uncertainty and turbulence, Brexit will be a challenge, but no more of a challenge than the Global Financial Crisis was before it, a period where well capitalised firms could invest for growth, coming out of the crisis in a stronger position. Businesses that can tilt their exposures to growing markets, and realise the opportunities that volatility and uncertainty can throw up will make profitable investments.
Forget FTSE 100 vs FTSE 250, remember the individual companies that make up those indices and the profitable investments they can provide.
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