FTSE 250 index analysis as UK M&A deals rise

The FTSE 250 index has staged a strong recovery this year as demand for British companies continued. It surged to a high of £20,710 on Thursday, its highest swing since April 25th. It has soared by over 25% from its lowest point in 2022.

UK M&A trends rise

There are signs that foreign investors are getting interested in undervalued British companies. BHP, the biggest mining company in the UK, has launched a hostile bid for Anglo American because of its copper assets.

Earlier this year, Thoma Bravo, a leading private equity company, acquired Darktrace, a big player in the cybersecurity industry in a £5 billion deal. International Paper also acquired DS Smith in a £8 billion deal that will create a giant in the packaging industry.

On Monday, I wrote that EQThad placed a bid for Keyword Studios, a company that provides services to firms like Activision Blizzard and Tencent. It launched an offer giving it a 70% premium to its closing price on Friday.

Further, Daniel Kretinsky, a Czech billionaire is acquiring IDS, the parent company of Royal Mail and GLS. He believes that the company is undervalued and has more room to grow in the long term. Blackstone also acquired Hipgnosis Songs Fund in a £1.4 billion deal.

The most recent deal came from CVC and Adnoc, who launched an offer for Hargreaves Lansdown, the giant investment broker in a £4.6 billion. The company rejected the offer, noting that it substantially undervalued the business.

Analysts believe that more buyout deals will be announced in the coming years since small-cap UK companies are undervalued. The FTSE 250 index has a price-to-earnings multiple of 9, lower than the S&P 500 ratio of 21.

The key concern among investors is that the Bank of England (BoE) will delay its rate hikes now that inflation is not falling as quickly as expected. Small-cap companies tend to be more affected by higher rates than their large-cap counterparts.

The best-performing companies in the FTSE 250 index this year are CMC Markets, Bakkavor, Darktrace, Hochschild Mining, and Trustpilot. On the other hand, the top laggards in the index are firms like Ferrexpo, Watches of Switzerland, Close Brothers, and Aston Martin.

FTSE 250 index forecast

The weekly chart shows that the FTSE 250 index has staged a strong recovery after bottoming at £16,784 in December last year. It formed a double-bottom pattern at that point and has now continued its recovery.

The index also formed an inverse head and shoulders pattern. It has also moved above the resistance level at £20,600, its highest swing in January last year. The index has moved above the 25-week and 50-week moving averages and the 50% Fibonacci retracement point.

Therefore, the index will likely continue rising as buyers target the key resistance level at £21,400, the 61.8% Fibonacci Retracement point. The stop-loss for this trade is at £20,000.

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