Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.
Periodically, we’ve looked at the valuation of the broad UK stock market and the FTSE 100. We concluded both are very inexpensively valued compared with world markets. But what about the more domestically focused, mid-cap stocks of the FTSE 250 index?
For many investors the FTSE 250 has traditionally proven a rich hunting ground. It is often thought to represent the sweet spot of the market, where you can find rapidly growing companies that have already traversed the riskiest parts of their expansions.
Growth normally costs. For example, Wall Street’s “Magnificent Seven” mega-cap stocks promise strong growth for years to come, but they don’t come cheap. The NYSE FANG+ index trades on around 54 times trailing earnings, having risen by around three quarters since the turn of the year1.
However, FTSE 250 growth looks considerably more affordable. The index traded on just 10.2 times historic earnings at the end of October, even after a strong rally to end the summer blues. This looks low, particularly in view of the 7% average growth in earnings recorded by the Index’s constituents over the past five years2.
What’s more, FTSE 250 companies no longer trade at a premium to the FTSE 100, which currently trades on an historic earnings multiple of 11 times3. The FTSE 250 now trades at a 45% discount to world stock markets4.
Source: Refinitiv total returns from 31.10.18 to 31.10.23
Past performance is not a reliable indicator of future returns
Like blue chips, medium sized companies in the UK have suffered from past uncertainties including Brexit and the period of domestic political instability that followed. More recent concerns have centred on the possibility of a recession and what the UK’s consumer-based economy might do in an environment of high inflation and rising mortgage costs.
Now such fears are looking increasingly overblown. The UK economy flatlined through the summer, but avoided recession. Meanwhile, inflation has been coming down in leaps and bounds. A significant fall in domestic interest rates next year looks increasingly plausible.
Moreover, large numbers of households now own their own properties outright, limiting the effects of higher monthly mortgage repayments on the overall economy compared to previous cycles.
There’s another thing too. The FTSE 250 is often characterised as a play on the domestic economy while the FTSE 100 is considered to be predominantly international in nature. This is now only partially true.
Around 57% of the revenues of FTSE 250 companies now come from overseas, meaning that the index has also become more a play on world growth than it is on the economy at home5. That adds meaning to the index’s current low rating in comparison with most other world stock markets.
Where the UK indices differ is in their industry exposures. The FTSE 100 has a higher exposure to energy, mining and consumer staples. This largely secured the index’s flat performance in 2022 as most other world markets fell. By comparison, the FTSE 250 has larger weightings in financials, industrials and real estate.
The FTSE 250 is also currently home to many established companies with the potential to deliver further good growth. High profile examples that frequently feature among the holdings of actively managed UK equity funds include: Games Workshop, easyJet, WH Smith and the instrumentation and software company Spectris.
Fidelity’s Select 50 list of favourite funds now includes the Vanguard FTSE 250 UCITS ETF, which tracks the FTSE 250 for an ongoing charge of just 0.11%. As such, this fund offers investors so inclined a way of carving out the UK market’s sweet spot at minimal cost, while much of the investment world appears to be concentrating elsewhere.
Five-year performance table
| (%) As at 31 Oct |
2018-2019 | 2019-2020 | 2020-2021 | 2021-2022 | 2022-2023 |
|---|---|---|---|---|---|
| FTSE 100 | 6.5 | -20.5 | 34.5 | 1.7 | 7.2 |
| FTSE 250 | 9.1 | -12.3 | 37.0 | -20.5 | -1.3 |
Past performance is not a reliable indicator of future returns
Source: Refinitiv, total returns as at 31.10.23. Excludes initial charge.
1 Bloomberg, 16.11.23
2 Vanguard, 31.12.23
3 Bloomberg, 16.11.23
4 iShares, 14.11.23
5 FTSE Russell, 18.10.22
Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. There is no guarantee that the investment objective of any Index Tracking Sub-Fund will be achieved. The performance of the sub-fund may not match the performance of the index it tracks due to factors including, but not limited to, the investment strategy used, fees and expenses and taxes. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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