Interactive Investor

The FTSE 250 stocks causing problems for the mid-cap index

12th October 2021 14:52

Graeme Evans from interactive investor

UK mid-caps have easily outperformed blue-chips over the past year, but have had a poor run since hitting a record high. Here’s why.

This year's love affair with mid-cap stocks is showing serious signs of fatigue after supply chain and inflationary pressures triggered a sharp fall for the UK-focused FTSE 250 index.

London's second-tier benchmark had been among the best performing out of all global indices in 2021. It even kept pace with the tech-laden Nasdaq after gaining as much as 17% on the back of international investors tuning into UK stocks for the first time since the Brexit vote.

But after this summer's succession of record highs for the FTSE 250, the mood has soured considerably in recent weeks against a backdrop of negative news from the UK economy.

The spike in natural gas prices, labour shortages and soaring freight rates are all factors driving up margin pressure and depressing the outlook, particularly for consumer-focused stocks.

The FTSE 250 index is down as much as 8.6% since its record high of 24,353 on 1 September, in contrast to the FTSE 100 index, which has stayed broadly the same as it benefits from exposure to heavyweight global sectors such as pharmaceuticals, banks, energy and commodities.

AO World (LSE:AO.) sums up the shift in sentiment in the FTSE 250 after the online electricals retailer warned that profits will be squeezed by issues including a shortage of delivery drivers.

Peel Hunt called the update a bump in the road, but that's not stopped the shares shedding 36% of their value since the beginning of September for the biggest fall across the FTSE 250.

Sentiment has also been shaken in the hospitality sector, with Restaurant Group (LSE:RTN) shares off 23% and Mitchells & Butlers (LSE:MAB) down 22% over the same period. Others with supply chain exposure include building material firms Travis Perkins (LSE:TPK) and Ibstock (LSE:IBST), off 17.5% and 22%, respectively.

Rising bond yields and expectations for higher interest rates have also diminished the appeal of tech stocks and other high-growth sectors where present value is based on future cash flows.

Online greetings card retailer Moonpig (LSE:MOON) has been among the casualties, falling 21% since 1 September despite a recent upgrade to profits guidance for the 2022 financial year. Shares listed in February at 350p and rallied as high as 488p on the back of the FTSE 250 boom, but are now back at 305p.

Cybersecurity firm NCC (LSE:NCC) and online reviews business Trustpilot (LSE:TRST) have also fallen 22% and 19% respectively.

Simon French, chief economist at Panmure Gordon, thinks the rotation away from growth stocks into value has more to do with the FTSE 250's underperformance than concerns about supply shortages or empty fuel pumps.

He told the Times that the FTSE 100 has considerably more companies that tend to do well at the prospect of rising interest rates, such as banks and insurers. French also noted that UK stocks still trade at about a 15% discount to non-UK stocks, based on metrics such as price/earnings and price-to-book ratios.

One other factor behind the recent weaker performance for the FTSE 250 index has been the slowdown in UK takeover activity. Targets earlier this year included Aggreko and St Modwen Properties, but figures from Peel Hunt yesterday showed the number of companies under offer at the end of September had fallen to 26 from 32 a month earlier.

Four UK plcs entered new bid situations in September — Safestay (LSE:SSTY), Stagecoach (LSE:SGC), Entain (LSE:ENT) and French Connection (LSE:FCCN) — but none are listed in the FTSE 250.

On a brighter note, some second-tier stocks have enjoyed a strong autumn so far. One of the most interesting is Centrica (LSE:CNA), which has risen 18% since the start of September, as it benefits from the demise of smaller rivals following the surge in wholesale gas prices.

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