Why small can be beautiful
Some of the best investment opportunities in the UK lie outside the FTSE 100.
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Investors in UK equities tend to focus on the FTSE 100. It’s the standard measure of how the UK stock market is performing and represents the performance of Britain’s biggest companies. But there’s more to UK plc than the FTSE 100, and some of the best opportunities right now lie elsewhere.
We think that size plays a much smaller role when comparing UK large and mid-caps than the nature of their underlying businesses. The FTSE 250 has a greater proportion of companies in so-called ‘cyclical sectors’, and a higher proportion of revenues generated domestically than the FTSE 100. This leads us to two important conclusions about the performance of the FTSE 250:
- it benefits from increased levels of economic activity
- it suffers less from a strong appreciation in sterling
These factors have been instrumental in our decision to increase our allocation to more domestically orientated, medium-sized UK companies.
The 20% fall in sterling in the months that followed the EU referendum vote in 2016 led to a strong appreciation in earnings for large international companies and a surge in the FTSE 100. Meanwhile companies in the FTSE 250 suffered from their stronger domestic exposure, as well as from the sharp slowdown in UK GDP growth amidst lower levels of investment and consumption caused by heightened uncertainty.
When Brexit uncertainty is resolved, we expect to see sterling strengthen and UK economic activity increase. This should favour FTSE 250 companies, with their greater exposure to the UK economy, and we’ve added to our exposure accordingly.
When investing, past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.
We have increased our investment in the FTSE 250 – the largest companies outside the FTSE 100.
We think these more UK-focused firms could benefit when Brexit is resolved as that should strengthen sterling and boost Britain’s economy.
About Coutts Investments
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