UK mid-caps outshine blue-chips as investors bet on economic rebound

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

A rally in housebuilders and infrastructure stocks has helped smaller UK equities power ahead of their blue-chip counterparts this month, but a recent global growth scare threatens to undermine the rush of enthusiasm for domestically focused stocks.

Since the start of July, the week of the UK election, the mid-cap FTSE 250 index has added 3.2 per cent, contrasting with a meagre 0.2 per cent rise for the FTSE 100.

The mid-cap index is seen as more closely tracking the strength of the UK economy than its large-cap counterpart because it is more heavily weighted towards cyclical stocks that move with domestic demand.

Investors are hoping that the performance of the UK economy, compared with other G7 markets such as Germany, will keep international investors enthusiastic for UK stocks, even as fears of a global recession have shaken equity markets in the past week.

“There’s enthusiasm for UK exposure,” said Charles Hall, head of research at Peel Hunt, who pointed to the political stability provided by the new government.

“If you are an international investor, it is much easier to choose the UK market compared to a number of other European ones, in a way that has not been the case probably since . . . Brexit,” said Hall.

Underscoring the broad nature of the rally, the share prices of only 42 companies have fallen in the past month.

Housebuilding-related stocks have been in demand in part on hopes that the Labour government can free up the UK’s planning system.

Building supplies group Travis Perkins and Hill & Smith have gained 12.7 per cent and 10.1 per cent, respectively, in the past 30 days, while ventilation company Volution is up 11.1 per cent.

Renewable power provider Drax Group has risen by a fifth after the new Labour government promised investment in green energy.

“As it becomes clearer how the policy agenda of the Labour government will look in detail, that affects the small- and mid-caps . . . much more than those mega-companies that have a global footprint,” said Joachim Klement, research analyst at Panmure Liberum. 

In a research note in July, Goldman Sachs said the UK was also a “good diversifier” away from concentrated positions in US megacap stocks but noted that higher interest rates also tended to push up the value of sterling, which was helpful for more domestic-focused UK stocks.

Analysts are hoping the Bank of England’s decision this week to cut interest rates for the first time since 2020, to 5 per cent, could buoy the trend further.

As inflation moderates, investors are expecting that domestic consumer sentiment will improve, while lower rates should help financing conditions for smaller companies. Panmure is pencilling in one more rate cut, of 0.25 percentage points, in November.

“[A rate cut] boosts the confidence in smaller companies, that they will face a better environment in terms of the cost of doing business,” noted Klement.