Midcap stocks in the U.K. surged to a record Tuesday, shaking off a slide in the pound to a three-decade low against the U.S. dollar as investors focused on domestic economic data and the potential for increased merger activity.
The FTSE 250 MCX, -0.39% leapt 0.9% to end at 18,342.07, marking an all-time closing high, according to FactSet data. It’s now up about 23% from the low it hit after the Brexit referendum in June.
Roughly 52% of revenue for companies that make up the FTSE 250 is derived from the British economy, so a drop in the pound isn’t always welcome news for many U.K.-exposed companies.
But sterling’s downward trajectory isn’t the only factor driving action for midcaps.
The “FTSE 250 is participating in the rally because we’re having our cake and eating it at the moment,” said Jasper Lawler, market analyst at CMC Markets. The weaker pound “obviously helps the multinationals but the economy is doing fine and that helps the domestic firms, too.”
The FTSE 100 UKX, -0.39% blue-chip benchmark closed at its highest since April 2015 as the pound GBPUSD, -0.1962% slumped to a 31-year low below $1.28. The pound has been slammed by a flare-up in Brexit-related worries, particularly concerns that the U.K. government will prioritize immigration issues over access to the EU’s single market in the Brexit talks.
Stronger-than-anticipated U.K. construction activity data released Tuesday added to a series of reports showing the economy has held up fairly well after the U.K. in June voted to leave the European Union. The final estimate of second-quarter economic growth released last week was raised to an annualized rate of 2.7%, compared with an earlier estimate of 2.4%.
Some of the FTSE 250’s smaller, or so-called challenger banks, “are being supported by some fairly good U.K. economic data which is still coming through,” said Richard Hunter, head of research at Wilson King Investment Management.
He also said investors should watch for potential gains for the index’s insurers, as “they tend to have more overseas earnings” than other U.K.-focused businesses, he said.
Metro Bank PLC shares MTRO, +0.22% turned lower to close down 1.5% on Tuesday, but last week finished the third quarter with a nearly 53% rally. Insurer Hiscox Ltd. HSX, -0.57% rose 0.6% on Tuesday and closed the third quarter up about 1%.
M&A attraction: Lawler noted that FTSE 250 constituent Henderson Group PLC HGG, +0.57% on Monday reached a deal to merge with investment management firm Janus Capital Group Inc. JNS, +0.65% which should expand their reach in the U.S., Europe and other regions.
“U.K. midcap companies are far from down and out. Some deals are getting done and when you’re talking about a drop in the pound, which companies are going to be the best targets for foreign companies stepping in and taking advantage…from a takeover perspective?,” Lawler said. “It’s not going to be, for the most part, the big blue-chips. It’s going to be slightly further down the ladder.”
While equities have been shooting higher in the short-run, “there remain a number of issues apart from Brexit and sterling which investors need to keep an eye on,” Hunter said. “The next Fed decision, which December seems to be the favorite for the next [rate] hike, and the U.S. presidential election is coming more on center now.”
SOURCE: MarketWatch
