FTSE laggards in the mid-cap and small-cap arena, post-Brexit day!

January 31, 2020 marked a memorable day in the history of Britain as on the same date the UK exited its 47-years long membership of the European Union, which began in 1975. The country also entered into a 11-month long transition period to negotiate a comprehensive trade deal with the EU.

However, a compromise might be possible, but the risk of the UK leaving the European Union bloc at the end of 2020 without any trade agreement is still doing the rounds.

The transition period in which the UK has entered lasts only until the end of 2020, by which time a comprehensive trade agreement needs to be negotiated. But, as the negotiation began from February 03^rd 2020, the difference between both the sides are being perceived as wider than ever.

Meanwhile, EU's chief negotiator, Michel Barnier, said that it was the UK's choice to have a distant relationship, different from what EU wanted. However, he also added that the EU was ready to offer a zero-tariff and a zero quota-free trade agreement that is more munificent than Canada's, with conditions.

A fear of no-deal divorce of the UK from the EU is again clouding the minds of the investors, which has resulted in the British currency to make a nosedive since the Brexit day. The Pound has plummeted more than 1.0% against the US dollar since Brexit day to February 11^th, 2020.

However, despite a fall in the British currency, the broader mid-cap and small-cap indices of the UK have managed to deliver positive returns since Brexit day to February 11^th 2020, as the FTSE 250 – which gauges UK’s medium-sized businesses listed and traded on the London Stock Exchange has so far added 1.66% since Brexit day to February 11^th 2020, and the FTSE Small-Cap Index added so far approximately 0.70% during the same time period.

A vast majority of gains was fuelled by falling crude oil prices in the international commodity market and we believe that if the threat of a no-deal continues to do its rounds in Britain, there might be some correction in UK’s mid-caps and small-caps as well.

Here, in this piece of work, we are sharing a list of mid-cap and small-cap stocks, which have so far traded in the negative territory.

FTSE mid-caps and small caps that traded in the red (from January 31^st, 2020, to February 11^th, 2020).

*Source: Thomson Reuters

However, while analysing mid-cap and small-cap performance since Brexit day to February 11, we found that there were total 59 stocks out of the FTSE 250 constituents, which reported negative returns, according to the Thomson Reuters database and there were total 126 small-caps out of those in FTSE All Share index that reported negative returns. It implies that pain is relatively higher in the small-cap arena vs the mid-caps. Also, within the small-cap arena finance and insurance stocks were badly hit as 44 stocks pertaining to this particular sector traded in negative territory, followed by manufacturing sector in which 14 stocks were laggards in the same time period and Real Estate and Rental and Leasing was the third most laggard sector among the UK’s small-cap constituents.

This pain could be deeper, if a trade deal between the UK and EU, which is due to materialise by the end of this financial year, remains unnegotiated. Jolted investor sentiment can be gauged from the prevailing movement in the British Pound, which has traded so far in the negative zone since the UK delivered the first stage of Brexit. Also, oil prices could shoot up further, as OPEC member countries are planning for a deeper production cut, which would weigh on some of gains that the mid-caps and small caps accumulated in the past couple of weeks.

However, in the wake of a trade deal in place between EU and UK, things could turn significantly positive for the stock prices of the UK’s quality mid-caps and small caps, as they have been considerably beaten down over the past three and half years. They are available at relatively cheaper prices against their global counterparts. Buying activity in the mid-cap and small-cap arena was broadly lacklustre, especially since Brexit referendum took place in June 2016. Investors are intelligently tracking probable mid-cap and small-cap counters which could deliver multifold returns in a relatively shorter span of time.