Mid caps surge to record high

Mid caps surge to record high as the FTSE 100 returns to level.

The FTSE 100's return to levels last seen as the dotcom bubble burst grabbed the headlines, but the FTSE 250 list of second-tier stocks has been "setting records of a rather more impressive kind", says Robert Cole in The Times. Now at an all-time high of 10,400, the mid-cap index has notched up a 92% gain over the past five years, against only 21% for the blue-chip FTSE 100. Anyone who bought a fund tracking the Footsie in March 2003, when both indices plumbed lows before the Iraq invasion, is sitting on an 87% gain, but banking on the FTSE 250 has produced a whopping 174% return.

Corporate activity, particularly in the utility and housebuilding sectors, has helped the FTSE 250 outperform.

"There is hardly a single stock in the index which is not under the microscope of a potential predator," says David Buik of Cantor Index, quoted in The Daily Telegraph. It also has relatively few banks, energy and pharmaceutical stocks, whose lacklustre performance has held back the FTSE 100, adds Mike Lenhoff of Brewin Dolphin.

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But is there potential for further gains? Both indices have more than recouped the ground lost in last May's "wobble", says Jeremy Warner in The Independent. Since then, the interest rate outlook has improved markedly, oil prices have eased and corporate profits continued to improve, while valuations are still well short of "the bubble inflated highs they achieved at the turn of the century". However, bear in mind the risk of a sharp US-led slowdown, says Damian Reece in The Daily Telegraph. Then, the FTSE 100, which seems to be "pretty reasonably priced", could play catch-up with the mid-cap index if investors opt for "a more defensive strategy".

There are signs that "the tide may be about to turn in favour of the mega-caps", agrees Heather Connon in The Observer. Another reason is that the takeover fever that has helped the FTSE250 may spill over into the FTSE100: private equity firms are now so ambitious that "no company is too big to be bought". Witness the capture of BAA, while both Vodafone and BT worth £66bn and £22bn respectively are cited as potential targets. And the Footsie's heavyweights offer further attractions. Their yield averages 40% more than the rest of the stockmarket, while buybacks are underpinning shares. For these reasons, mid caps may struggle to beat the large caps going forward.