A Comparative Analysis Of The Large-Cap And Mid-Cap Indices Of The UK (FTSE 100 vs FTSE 250)

  • Oct 22, 2019 BST
  • Team Kalkine
A Comparative Analysis Of The Large-Cap And Mid-Cap Indices Of The UK (FTSE 100 vs FTSE 250)

FTSE 100 is a broader index of the London Stock Exchange and represents the movement of a group of 100 largest stocks by market capitalisation traded on the London bourse. It is also considered as the UK’s large-cap index, a portfolio of the 100 largest companies by market capitalisation. On the other side, FTSE 250 is the mid-cap index of the London Stock Exchange and gauges price movement in the next 250 companies by market capitalisation. Both FTSE 100 and FTSE 250 are globally tracked indices, and both are market-capitalisation weighted indices.

However, the FTSE 100 index consider more as a global index as many of the FTSE 100 companies are global companies and commands significant market share globally. The majority of the earnings of the FTSE 100 companies comes from the foreign markets rather than the UK. The majority of FTSE 250 companies earn a larger share of their incomes from the UK and European markets.

However, since the Brexit referendum took place on June 23, 2016, many investors are under the impression that the broader index FTSE 100 index has outperformed the FTSE 250 index, as FTSE 100 companies have benefited from Pound Sterling devaluation. But the data tells us a different story. In absolute terms over the past five years, the mid-cap index of 250 companies has delivered a price return of 33.89% whereas the broader FTSE 100 index has handed out a price return of 12.59%, during the same interval of time. Also, on a YoY basis, the FTSE 250 is up by 8.27%, whereas FTSE 100 has gained just 2.31%. As FTSE 100 stocks are more global companies, they are also highly exposed to the global macro headwinds more than the constituents of FTSE 250 index. Since a year and a half, the trade spat between two largest economies of the world, the US and China, have jolted investors, manufactures and consumer sentiment globally. This has had an equivalent impact on the FTSE 100 stocks as well. A lone devaluation in Pound is not adequate to stimulate earnings of the FTSE 100 companies, there are other macro factors also which impact these companys’ performance.

However, till the time Dow Jones Industrial Average and S&P 500 keep hitting new highs, the FTSE 100 is also expected to catch up with US market performance.

What do fundamental exhibits for theses two broader indices of the UK?

Over the past three years, the broader index of the LSE, the FTSE 100 index delivered a price return of just 1.84% and registered a high of 7,903.50 and a low of 6,536.52 in between the past three years. In comparison, the broader index of the United States, the S&P 500 has handed out a price return of 40.42% in the same period. This implies that FTSE 100 index has not participated in the previous rally where other global indices registered new highs between 2016-19. Also, at the current trading level, the FTSE 100 was trading at a trailing Price-to-Earnings ratio of 14.09x, whereas the S&P 500 index was trading at a trailing Price-to-Earnings ratio of 21x, which shows that the UK market is trading at a lower a earnings multiple compared to its counterpart in the USA; also, with the lower-earnings multiple the dividend yield of the FTSE 100 index is higher compared to S&P 500 at 4.72%. The dividend yield of the FTSE 100 index 1.75 times of the dividend yield of the S&P 500 index. Hence, FTSE 100 stocks are trading at a lower earnings multiple with higher dividend yields. Also, despite a lot of macro headwinds hovering around the global financial markets, the US benchmark indices are oscillating near all-time highs, which reflects that there are lower downside risks in the FTSE 100 index and higher upside potential once the Brexit deadlock get resolved.

However, the FTSE 250 index has delivered a price return of 13.18% in the last three years, surpassing FTSE 100 gains over the same period, trading at a Price-to-Earnings multiple of 15.60x with a dividend yield of 3.3%. This exhibits that despite a relatively better performance against the broader index of the LSE, FTSE 250 index is still offering value opportunities in the mid-cap space with lower potential downside risk and higher dividend yields.

The lower PE multiple and a higher dividend yield of both the indices reflect Brexit-related risks which are well discounted at the current price level, as lower-earnings coupled with higher dividend yields are providing higher risk premium to the investors.

Therefore, long-term prospects for both the large and mid-cap indices of the LSE are decent with higher risk-premium lead opportunities available in the market. The history of bear cycles across the world reveals that whether it was dot.com bust of 1999-2000 or financial crisis of 2008-09, the market has always bounced back with stronger fundamentals and risk tolerance  and registered new life-time highs, which potentially may take place in a year or two in England as well.

How Technical is moving in both the broader gauges of the LSE?

While writing the technical wrap of the broader indices (as on October 22, 2019, at 10:20 AM GMT, before the LSE closed), the FTSE 100 index was quoting at 7,183.46, however, the near-term trend is index is bit negative as the at the current level, the index was quoting well below its short-term and long-term support levels of 50-day and 100-day Exponential Moving Average.  Also 14-day Relative Strength Index (RSI) of the index is oscillating in the neutral zone. Also, Moving Average Convergence Divergence indicators are falling, with its 12-day EMA quoting lower than 26-day EMA.

However, technical indicators are trending positively in the case of FTSE 250 index, as at the current trading level of 20,302.56, (as on October 22, 2019, at 10:39 AM GMT), the index was quoting well above its short-term and long-term support levels of 50-day and 200-day EMA. Also, Moving Average Convergence Divergence indicators are rising, with its 12-day EMA quoting above 26-day EMA and MACD oscillator hovering above the 9-day EMA, which is a favourable trend in any index.

Therefore, above technical wrap exhibits that he broader FTSE 100 index is passing through unfavourable technical trends, but any positive development relating to Brexit could substantially reverse the trend as well; however, technical indicators are trending favourably for UK's mid-cap index, the FTSE 250.

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