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Forget the blue chips – the action over the past few years has been in medium-sized companies. The FTSE 250 mid-cap index (of companies worth between £250m and £2.5bn) has hit another record high, just below 7,800, and is almost 100% up on its March 2003 low, while the FTSE 100 has gained about 60% since then. The mid-caps have outpaced their larger counterparts for each of the past five years, gaining 10% during this period, while the blue chips have slid 20%. This year alone, mid-caps have outperformed the blue chips by 1.6%.
Mid-caps are more exposed to the domestic economy – which has performed strongly over the past few years – and are thus insulated from problems such as currency fluctuations that stem from doing business overseas. The greater proportion of cyclical stocks compared to the blue-chip index has also helped against a backdrop of strong global and UK growth; the FTSE 100 is a more defensive index.
Also, as the FTSE 250 is more volatile, it tends to outperform in a rising market, as Jim Mccafferty of Seymour Pierce notes in the FT. Conversely, it will lag in a falling market – witness the mid-caps’ 9% slide during the market wobble in February and March, when the blue chips declined by just 5%.
Meanwhile, around 10% of the FTSE 250 has been bid for in the past 18 months, and there have been 25 takeovers. Mid-caps appeal to bidders because “they are large enough to justify inevitable acquisition risks […] but not so big as to be indigestible”, says Robert Cole in The Times. Only two blue chips have been taken over in the past 18 months.
Bid speculation may have pushed the mid-caps to their current highs, says Simon Nixon on Breakingviews.com, “but it’s hard to see what could push them higher”. Thanks to mid-caps’ exposure to economically sensitive sectors such as retail, they are vulnerable to Britain’s increasingly fragile consumer confidence.
And now that concern over global growth is mounting too as oil prices have climbed, the overall market may come under pressure, which presages under-performance by the mid-caps, says Christopher Brown-Humes in the FT. Mid-caps are looking pricey compared to blue chips on a p/e of 18.3 and a yield of just 2.5%; the FTSE 100 is on 14 and 3.2% – despite the fact that blue chips are expected to grow earnings faster than mid-caps in 2005. So don’t count on mid-caps outstripping the blue chips for yet another year
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Andrew Van Sickle
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