Forget the FTSE 100 – it’s the 250 that matters
SO far, Brexit has been little more than a storm in a teacup for the stock market as the FTSE bounced back this week and is now higher than it was at the start of the year.
But the FTSE 250 index of mediumsized companies is still 5pc lower than it was before the referendum result.
The FTSE 100 might be the most famous index of UK shares but it doesn’t actually give much insight into the state of the UK economy.
That’s because around 70pc of the revenues produced by the largest 100 businesses in the country actually come from overseas, typically in dollars. That means if the value of the pound falls – as it has done since Brexit – they actually do better. The FTSE 250, meanwhile, is made up of the 250 largest companies outside the FTSE 100. It is filled with firms which are more UK focused such as housebuilders, estate agents, pub groups, travel companies and retailers.
These are industries which rely on a strong UK economy and a confi- dent, spendthrift consumer. Over the past week many have tanked. But some decent companies are getting caught up in the crossfire as investors panic-sell.
Mark Martin, head of UK equities at Neptune Asset Management, says: ‘ Some babies are definitely being thrown out with the bath water as investors sell FTSE 250 shares indiscriminately.
‘But it makes for an exciting environment when companies are being sold just because they happen to be in the UK or in a certain index, when actually the fundamentals of the business have not changed, and in some cases may even have improved.’
Savers wishing to take advantage of the buying opportunity need to be picky.
Martin owns no housebuilders – ‘they looked overvalued in the run-up to the referendum’ – but he’s keen on healthcare companies. Many get a lot of their earnings from overseas and the nature of their business means that demand for their products isn’t pegged to the economy. He cites animal genetics firm Genus.
Elsewhere he likes Devro, a firm which manufactures cas- ing for sausages. It only sells 5pc of its products in the UK and is a major beneficiary of the growing consumption of protein in emerging markets.
Jo Rand, co-manager of the Rathbone Recovery fund, is looking for businesses with good initiative, strong management and sensible balance sheets.
She likes IT company Micro Focus, which she says is set to benefit from a recent good acquisition. Another top pick is food wholesaler Booker.
Rand says: ‘But in the short term it will be those sectors which can benefit from weaker sterling that will be the relative winners, industrial businesses such as engineering group Spirax-Sarco.’
Investing in these mediumsized businesses can be a bumpy ride. The companies are smaller than their FTSE 100 counterparts and tend to be more linked to the UK economy rather than having their risk spread out across the globe. That means short-term bets are generally not the best course of action. But for those savers who think panic is causing these shares to be oversold and are prepared to wait, now could be the time to strike.
Jason Hollands, managing director at Bestinvest, says: ‘I would still be cautious towards companies in areas that are very sensitive to the UK economic outlook or which are heavily dependent on crossborder trade with the EU until the dust settles. Instead, focus on companies that do business beyond the UK or which provide services we are likely to keep on using through tough times as well as good ones.’
He likes the Franklin UK Mid Cap fund. It has 10pc of its investments in industrial engineering firms including Bodycote and Victrex.
He also likes the Liontrust Special Situations fund, which looks for opportunities across the entire FTSE All Share. Biggest investments include Unilever, property website Rightmove and healthcare software provider Emis Group.