Should You Consider Investing in FTSE Mid-Cap Stocks Now?

Summary

• Mid-cap stocks are considered as a crucial barometer of the UK economy’s health
• In the backdrop of several trade agreements under negotiations, the mid-cap stocks are particularly likely to do well
• These stocks have delivered double-digit returns in the last six months

FTSE 250 index is an array of stocks ranked in the order of their market capitalisation. These stocks are primarily referred to as the mid-cap stocks. These set of stocks reflect the health of the UK’s domestic economy and are looked upon as a yardstick by the institutional investors and market experts. In addition, investing in these mid-cap businesses helps in adding more headroom for growth and diversification in a portfolio.

The UK’s economy was reviving after Brexit and the general elections, until it was struck by the coronavirus pandemic. As per Boris Johnson, the British Prime Minister, UK seems to have passed its pandemic peak and is gearing up for growth. Investing in the mid-cap companies could provide ideal exposure to the investors who believe in the strength of the UK’s economy. The FTSE 250 index has recovered by more than 35 per cent after slipping to 12,500 level during the peak of the unprecedented crisis.

Why mid-cap stocks?

With domestic businesses being allowed to operate with sector specific guidelines, access to easy credit, and free trade negotiations with the United States under development, investing in FTSE listed mid-cap businesses might lead to a new realm of opportunities. The UK-US trade pact would lead to increased investments, increased exports of goods & services along with digital trade and exchange of professional services will lead to increased employment. Furthermore, UK is likely to benefit in terms of regulation of financial services with trade pact from the United States. UK is also negotiating with Japan and EU with respect to trade agreements. This could certainly help the domestic businesses flourish in the long term.

Also read: UK-Japan Trade Deal and Its Impact on Different Businesses

In addition, as the UK is nearing its Brexit deadline of end-December 2020, businesses are consolidating to leverage upon their existing strengths and increase their foothold in the market. Software company, Aveva Group (LON:AVV) recently acquired US based tech firm OSIsoft.

FTSE listed mid cap businesses have always made a huge contribution to the UK’s economy. In the present scenario when the countries are formulating a prudent approach towards international trade and the US-China row has escalated sending jitters to the international trade relations amongst various countries, it calls for a major rerouting of the global supply chains.

Moreover, the UK-based manufacturers are looking to bring most of their operations back home. This is conceptualised to reduce dependencies on global supply chains, which got exposed due to the catastrophe caused by the coronavirus pandemic. According to a leading information provider, IHS Markit, UK’s PMI (Purchasing Managers Index), which indicates manufacturing trends, jumped to 53.6 in July of 2020 pointed to the strongest increase in factory activity following the easing of lockdown measures to contain the spread of the coronavirus disease.

All these factors would force the indigenous businesses to innovate and contribute their bit to the domestic economy. In the post pandemic era, all the nations would be looking forward to promoting home domiciled industries, including Britain. The coronavirus pandemic has taught the world enough lessons after devastating the global economy both in terms of human as well as economic costs.

According to some experts, the British economy has been steadily moving towards a ‘V’ shaped recovery, while few others believe that it is presently in an unchartered territory and they are hinting towards a ‘U’ shaped recovery. The markets have seen considerable amount of correction in stock prices, which could tempt the investors to include them in their watchlist. In addition, these stocks are reasonably prices and could be bought in larger quantities in comparison to large-caps. Mid-cap stocks provide the best of both worlds when compared to large-caps and small-caps. These stocks have enough headroom to grow with good amount of liquidity.

(Source: Refinitiv, Thomson Reuters)

1. AO World Plc (LON: AO.)

AO World Plc is into the business of electrical appliances and consumer electronics across UK. AO world is aware of the business and economic uncertainties prevalent in UK and their impact on the company’s business in the medium-term due to coronavirus pandemic and Brexit. However, it has a strong balance sheet, infrastructure, and ecosystem to remain afloat during the uncertain times ahead. The Company witnessed improvement in demand for products and services. AO is focused on strengthening teams and infrastructure with continuous investment to ensure resilience in the business along with top-notch customer service. The year-on year revenue in UK increased by 58.9 per cent to £401.3 million in the four-month period ended 31 July 2020.

2. Petropavlovsk Plc (LON:POG)

FTSE 250 listed Petropavlovsk Plc is a London-registered Gold Mining Company with operations in the Far East of Russia. In the long-term, the Group seems to be well-positioned to grow ahead of the end markets supported by a robust balance sheet and decent cash generation. During the first half of 2020, the Company delivered a 42 per cent increase in gold production to 320.6 koz (H1 2019: 225 koz). The company is likely to gain momentum, as the gold has rallied and breached the level of US$ 2000 per ounce for the first time in last nine years.

3. Gamesys Group Plc (LON:GYS)

UK based Gamesys Group is into the business of providing online gaming platforms. It is a flourishing sector as people looked forward to home entertainment alternatives as lockdown was imposed due to the coronavirus pandemic. During H1 2020, the reported gaming revenue increased by 101 per cent year-on-year to £340.0 million (H1 2019: £169.5 million), reflecting continued exceptional growth in Asia and robust growth in the UK. The Board has declared an inaugural interim dividend of 12 pence per share.

4. Hastings Group Holdings Plc (LON:HSTG)

FTSE 250 listed, Hastings Group Holdings Plc is a general insurance company. The gross written premium in H1 2020 increased by 3 per cent to £514.9 million (H1 2019: £499.2 million). However, the motor claims have gone down as compared to the same period the last year due to the economic impact of novel coronavirus. Moreover, the underlying inflation in repair costs can dent the cash outflows in the near term.

5. Avon Rubber Plc (LON: AVON)

Avon Rubber is a technology group, which designs and manufactures critical products and services primarily for military and fire markets. Avon Protection had been recently awarded a 10-year contract by the NATO Support & Procurement Agency. The contract is for supplying FM50 mask systems, air systems, filters, spare parts, and accessories. The decent opening order book of £115.5 million provides good visibility for the future. The Board remains confident that the business is well placed to continue to deliver sustainable growth in the medium-term.

As the markets have undergone steep correction, it is an ideal time to put your money in mid-caps. These investments would help in accumulating wealth while it would also be a contribution to strengthening the British economy. Though such investments are subject to witnessing cyclical downturns, at the same time, they have the potential to deliver solid growth in the long-term.