U.K. Midcaps Back in the Spotlight Beating FTSE 100 by Most Ever

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While the U.K.’s largest companies are struggling under the weight of a stronger pound and weaker iron-ore prices, their mid-cap peers are shining.

The FTSE 250 Index is eclipsing the exporter-heavy FTSE 100 Index by the most on record, as measured by the absolute spread between the two equity gauges. U.K. midcaps’ outperformance comes as Prime Minister Theresa May’s call for a snap general election in June has boosted the pound. A stronger sterling is a drag on the FTSE 100, whose members get about three-quarters of their revenue from outside the U.K.

“What’s good news for the pound is bad news for the FTSE 100,” Kathleen Brooks, research director at brokerage firm City Index in London, wrote in a note. “The FTSE 250 index could be better protected from the downside forces weighing on the larger indices, as it is more correlated to the performance of the U.K. economy.”

The midcap gauge, whose constituents get roughly 50 percent of sales domestically, also dipped after May’s decision sent the pound surging Tuesday, but its drop was nearly half that of the FTSE 100. It recovered Wednesday, up 0.6 percent, while the gauge of megacaps fell, erasing its gain for the year.

The FTSE 250 may be set to benefit from improving growth prospects at home, according to Brooks. After the U.K. economy performed better than expected following the June referendum to leave the European Union, the International Monetary Fund revised up its forecast for 2017 growth more than any other country’s in its latest projections. The IMF lifted its estimate for 2017’s expansion to 2 percent from the 1.1 percent seen in October.

Conversely, it’s not just the stronger pound that’s causing British megacaps to underperform. The FTSE 100 -- of which roughly 9 percent are materials firms -- is particularly sensitive to the drop in iron ore prices, which has proven a drag on commodity companies, Brooks said. That may cause a further divergence between the benchmark index and its midcap peer.

“New historical levels could be on the cards for this index, even if the FTSE 100 falters,” Brooks wrote, referring to the midcap gauge.

— With assistance by Gaurav Panchal

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