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After the Brexit inspired sell-off, thanks to rising earnings, the FTSE 250 index has recovered sharply to hit record highs and post gains significantly in excess of the benchmark FTSE 100. At the time of the referendum, the slide in sterling was expected to be a disaster for UK plc, especially for those companies without significant dollar earnings. Even so the weaker pound has helped boost exporters’ orders, and although a mild pullback has been seen following the UK Election Hung parliament result, the recent trend shows the pound is continuing to strengthen against the dollar and euro, This stability has enabled midcap companies as diverse as Auto Trader (AUTO), Cranswick (CWK) and Greene King (GNK) to thrive.
These conditions haven’t suited all firms though, and there are plenty still suffering a weak sterling discount. Few pundits could predict the earth shaking political events of the past year, but with Article 50 triggered, and the UK Hung Parliament result, Brexit negotiations over the next two years coupled with European political uncertainty make it hard to identify opportunities. And for many FTSE 250 companies, the risks of a possible UK consumer slowdown cannot be offset by currency gains or outperformance in other parts of the world.
Despite the uncertain backdrop, one key element of the revival among FTSE 250 companies has been strong corporate earnings and positive news flow. Across the board, profits and sales are rising, dividends are being increased, and companies are expanding despite the obvious macroeconomic and political risk. Plus as of yet, consumer spending appears untroubled by recent political events.
Looking ahead, the pound looks stable and set to continue rising against the dollar and euro, a factor that could benefit companies without significant dollar earnings. A stronger pound could also take the sting out of the recent rise in inflation, which has hiked costs for importers.
While the wider global political outlook remains uncertain, financial markets have reacted in a broadly positive manner to the Hung Parliament result. This looks likely to provide backing to the ongoing stability and potential recovery of the pound, which in turn will further support FTSE 250 companies, and for some may even result in stellar growth performances, such as that delivered by Cranswick (CWK) and Cineworld (CINE) over the past year.