Why Britain’s mid-cap stocks crashed

The FTSE 100, Britain’s main index, has had a shaky few days. But the FTSE 250 index has really taken a battering, say Michael Hunter and Rochelle Toplensky in the FT. Last Friday and Monday it slid by a total of 14%, its worst two-day loss since the crash of 1987. The blue chips fell by around 5% over the same period. The trouble is that the FTSE 250 is a much better reflection of the UK economy than its bigger counterpart. It is largely made up of medium-sized manufacturers, service companies and retailers. The FTSE 100 is full of large multinationals, and is unusually skewed towards commodities firms.

The blue chips make 75% of their sales outside the UK, and the weakness of the pound helps those who earn their revenue in

a foreign currency; many report in dollars. “Barring any immediate trade restrictions they should benefit” from the sterling slide, says Karen Olney of UBS. But the FTSE 250 firms get 59% of their revenues from the UK, estimates JPMorgan.

It hardly helps that fund managers have been trimming exposure to the FTSE 250 in any case: it has outperformed the 100 by 90% since the bull market began in March 2009. In the past few days, hedge funds have reportedly added to the selling spree by shorting-selling mid-caps – borrowing shares and selling them, in the hope of buying back later at a lower price. Until the uncertainty over Britain’s future relationship with Europe lifts, mid-caps seem likely to keep lagging the FTSE 100.