Bargain-hunters return after FTSE 250 slump

The mid-cap index has been hard hit by spiralling inflation and fears of slumping growth as Russian sanctions bite, reports our city commentator.

Bear market territory tempted investors back to FTSE 250 stocks today, as the UK-focused index finally got some respite after a 20% plunge fuelled by stagflation fears.

The FTSE 250 index had been one of the global frontrunners in the recovery from pandemic lows, but this outperformance over the FTSE 100 has reversed as London’s top flight index is now protected by its greater exposure to rising commodity prices.

The FTSE 100 is less than 3% lower than at the start of September, compared with the 20%-plus fall for FTSE 250 index since it hit a record high around the same time.

The decline reflects an unwinding of 2021’s re-opening trade and the lack of stocks with the pricing power to withstand this year’s dramatic surge in inflation. To make matters worse, Russia’s invasion of Ukraine means UK growth estimates are being revised sharply lower as household budgets continue to tighten due to spiralling energy bills.

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Capital Economics warned last night that petrol prices of £1.80 a litre and next month’s 54% increase in the utility price cap will raise CPI inflation to 8.3% in April, contributing to the consultancy cutting its GDP growth forecast for this year and next to 3.7% and 2.4%.

But the fear among investors is that a blanket ban on energy imports from Russia will have a severe impact on oil and natural gas prices that will choke the UK and global economies.

These stagflation worries mean the FTSE 250 index closed last night’s session in bear territory, as defined by a fall of more than 20% from its peak level. Other high-flying indices from 2021 in a similar position include the tech-laden Nasdaq and the FTSE AIM All-Share, with the latter down 27% from September’s 21-year high.

At one point on Monday morning the FTSE 250 slumped by as much as 4.5% after the prospect of a Russian oil export ban sent Brent crude surging as high as $139 a barrel.

The move by precision engineer Spectris (LSE:SXS) to end talks over a £1.8 billion takeover of Oxford Instruments (LSE:OXIG) due to market uncertainty added to the pressure, given that FTSE 250 deal-making had been another factor in the strong 2021 performance.

The second-tier index finished Monday’s session 1.1% lower compared with 0.4% for the FTSE 100, but comfortably outperformed the rest today as investors circled stocks that had been heavily sold such as low-cost airline easyJet (LSE:EZJ) and newspaper group Reach (LSE:RCH).

Watches of Switzerland (LSE:WOSG) also rallied after pointing out that it has negligible exposure to Russian and Ukrainian customers, adding that the top-of-the range financial guidance it gave a month ago was unchanged.

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Shares in the UK and US-focused company more than doubled during 2021 but are down by over a third so far this year.

One of the FTSE 250 stocks with momentum so far in 2022 has been power generation firm Drax (LSE:DRX), as it benefits from rising energy prices and the drive towards UK energy independence. Shares have risen more than 15% to above 700p this year, but analysts at Investec see further gains after lifting their target price to 790p today.

British Gas owner Centrica (LSE:CNA), whose longer-term prospects have been boosted by the collapse of smaller competitors in the wake of rising wholesale prices, added 2.9p to 75.1p.

In the FTSE 100 index, Lloyds Banking Group (LSE:LLOY) and NatWest (LSE:NWG) staged much-needed recoveries after their shares plunged on Monday due to the deteriorating economic outlook and prospect of fewer than expected interest rate rises this year.

Lloyds shares fell below 40p at one point yesterday, which compares with 54p less than a month ago. ITV (LSE:ITV) shares also attracted buying interest after earlier heavy selling in the wake of Thursday’s results, while there were also improvements for Rolls-Royce (LSE:RR.) and British Airways and Iberia owner International Consolidated Airlines Group (LSE:IAG).