FTSE 250 Index Gains Favour As Markets Shift

As financial markets continuously adapt to changing economic conditions, the mid-cap stocks of the FTSE 250 index have once again come under the spotlight. With the 250 gaining more than 10% over the past year, and the 100 adding a little under 7%, the delta is clear over a longer timeframe but the last 30 days of trading is even more evident.

Over the past ten years, the FTSE 250 has at times outperformed its heavyweight counterpart although these gains were often short-lived. Despite this, recent trends suggest a new window of opportunity may be opening for investors to capitalise on the lower-priced shares of these mid-cap companies.

Whilst the FTSE 100 index has dropped by 0.92% over the last month, the FTSE 250 has been quietly adding, with 2.6% gains in stark contrast. In the US, the Russell 2000 has gained almost 9.5%, as the S&P 500 has added 2.14%. The rotation may just be getting started.

Over the past year or so, smaller-cap stocks in the FTSE 250 began to demonstrate stronger performance relative to their larger FTSE 100 counterparts. This reversal in fortunes hints at a potential long-term shift in market dynamics, as interest rates and monetary policy changes could have differing impacts across the spectrum of companies.

This ‘rotation' of capital from mega caps to small caps has begun to occur in places within the US equity markets, and the same seems to be happening within the UK. As interest rates drop, and money to expand becomes cheaper, it is felt that smaller companies with opportunities to grow can do exactly that as conditions ease. The mega caps who are flush with cash, and positive cash flow businesses would already be seen to be in a position to expand where opportunities exist, and are not so dependent upon borrowing for this.

These market trends have occurred against a backdrop of high-interest rates that have also prompted investors to move their money away from the stock market into perceived safer havens such as cash and other investment vehicles. The impact of this rate hike environment is evident in the 2023 earnings reports of investment firms, with Abrdn plc. (LSE: ABDN), for example, citing high interest rates as a key factor in its significant earnings decline.

Within the context of mending the market dynamics, the Bank of England has taken a prudent step by advising banks to prepare for greater use of its repo facilities. This is in reaction to the bank's planned scaling down of government bond holdings, pointing towards a significant expansion of its current repo operations.

Investors may find that the current climate offers a fleeting chance to invest in the FTSE 250 index before they potentially experience a surge. With high interest rates steering funds to lower-risk investments, certain mid-cap stocks have emerged as attractive prospects for those willing to bet on their future ascent. As always, prudence and thorough research remain key in navigating these investment decisions.