FTSE 250 Index – No longer a pure play on UK plc

The FTSE 250 index, which makes up approx. 18% of the UK stock market, has been popular with investors since its launch in 1992.

Its popularity has been attributed to the perceived growth characteristics of many medium size companies, ‘mid caps’, its more UK domestic focus than its big brother, the FTSE 100 index, and finally the wide range of different sectors represented, unlike the FTSE 100 index, where banks, oil and pharmaceutical companies dominate. Indeed, since launch in October 1992 with dividends re-invested, the FTSE 250 index has delivered growth of double the FTSE 100 index – 3500%, compared with 1575% growth for the FTSE 100 index over the same period.

However, it has puzzled many investors that the FTSE 250 with its perceived UK focus has performed nearly as well as the much more international FTSE 100 since the Brexit vote last June. In fact, over recent years, the make up of the FTSE 250 has changed – today about 50% revenues of FTSE 250 companies are from overseas, so it is no longer a pure play on UK plc. With the sharp devaluation of sterling, this has produced large currency gains for companies with foreign earnings.

This has led KPMG to create a UK 50 index of companies which derive at least 70% revenue from the UK and a non-UK 50 index of companies where revenues are predominantly from outside the UK. The KPMG Non-UK 50 is dominated by oil and gas producers, mining, banks, tobacco and personal goods, whilst the KPMG UK 50 is predominantly banks, pharma and biotech, fixed line telecoms, real estate, media companies.

It is perhaps unsurprising that since June 2016, the best performers in the FTSE 250 have been mining companies, particularly Ferrexpo, Kaz Minerals, Vedanta Resources and Evraz. These mining companies have profited from the rise in commodity prices as well as the fall in sterling.

The best UK focused company was Metro Bank, placed a distant eighth overall. The laggards in the FTSE 250 index over the last nine months are focused on UK revenue earners, such as Dunelm, Pets at Home, Talktalk and Greene King.

It remains to be seen how the Brexit negotiations will progress, but in our view, it is now more important than ever to look at where companies derive their revenue, as well their business model and accounts. This allows an assessment of any Brexit risks, as well as helping factor currency into an assessment of potential investment returns.

Please note, this article is for information only and does not constitute investment or tax advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise; pension rules and tax legislation are subject to change; we do not give tax advice. If you would like investment or pension advice on your individual circumstances, please do not hesitate to get in touch on 01392 875500 or info@SeabrookClark.co.uk

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