UK mid-cap stocks look forward to life after lockdown

British mid-cap shares are enjoying the prospect of life after lockdown, says Danni Hewson of AJ Bell. The FTSE 250 has soared by 63.5% since its nadir in March last year, and hit an all-time high at the end of last week. Shares in everything from cruise ship business Carnival to shopping-centre owner Hammerson registered double-digit gains in the space of seven days.

FTSE 100 plods along

Investors in the blue-chip FTSE 100 are not feeling so jubilant, says Julien Ponthus for Reuters. The index is up by 4.5% so far this year but has underperformed other major markets for yet another quarter. It is still 7.5% short of its February 2020 level; trading around 6,880 points this week it also remains below the 7,000 level that it fell through as Covid-19 took hold.

The British market is often described as “unloved”, but perhaps “abandoned” would be a better word, says Ross Clark in The Spectator. The FTSE 100 is up by just 10% since the 2016 referendum. Over the same period the Hang Seng advanced by 42%, the Dax by 44% and the Dow Jones index by 88%.

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Yet more and more fund managers are now betting that the blue-chip index’s stodgy energy and financial businesses “have been hammered well beyond [what]they deserved, so there is bound to be a correction in their favour”. Funds network Calastone reports that £600m of net investment flowed into UK equity funds in March, compared with £151m in February, says David Brenchley in The Sunday Times.

The UK economy was particularly badly hit by the pandemic, with GDP contracting by 9.8% last year, compared with a 6.6% fall in the eurozone and a 3.5% decline in the US. That gives it more room to rebound. Indeed, the International Monetary Fund (IMF) thinks the UK is set to expand at its fastest pace since the late 1980s over the next two years, says Liam Halligan in The Daily Telegraph. While Britain’s first-quarter lockdown will see it lag the US this year, come 2022 it could be the fastest growing major developed economy in the world.

FTSE 250’s time to shine

The FTSE 250 is best-placed to gain from the UK rebound, says Laith Khalaf of AJ Bell. The FTSE 100 is very international: roughly 75% of blue-chip earnings come from overseas. That earnings split falls to 50% domestic and 50% overseas for the FTSE 250, not a “pure barometer of the health of the UK economy”, but closer than the FTSE 100. Since the turn of the century the mid-cap index has “wiped the floor with the big blue chips of the FTSE 100”. The FTSE 250 has returned 533% over the past 20 years, far superior to the FTSE 100’s 154%, notes Brenchley.

Fund managers punting on the blue chips are still hopeful that their time will come, says Ponthus. FTSE 100 shares trade on 14.2 times forward earnings, compared with 17.9 in the eurozone and the global average of approximately 19.5. Throw in an attractive 3.1% average dividend yield and UK shares are, as James Henderson of Janus Henderson puts it, “very, very cheap”.