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Higher interest rates boost UK mid-cap demand
09 July 2013
Economic recovery feeds through to FTSE 250
Increasing interest rates in the UK are driving investor interest in mid-cap stocks, according to exchange traded product specialist Step.
The firm said that indications of a sustainable recovery and an increasingly 'risk on' attitude among many investors had led to higher momentum among mid-cap stocks, with the FTSE 250 outperforming the FTSE 100 since autumn 2012.
It said mid-cap demad was likely a result of the FTSE 250 offering better exposure to UK growth trends than more internationally-focused large cap stocks, as in 2012, exports made up around 43% of FTSE 250 companies' total sales, compared to around 62% for FTSE 100 firms.
“With the top line geared towards exports and the bottom line subject to generous pay-out policies, the performance of the FTSE 100’s multinational heavyweights is essentially a reflection of global macro cycles with a defensive twist. In contrast, the performance of the FTSE 250 is underpinned by the secular, domestic growth themes of UK’s Mid Cap stocks, and led by capital returns as opposed to dividend yields,” said Step.
The firm argued that the UK’s economic recovery was on course to align itself to the US growth, with rising UK bond yields – as of 4 July, 10 year gilts were at 2.4% - able to rise “significantly higher” and channel investor interest into domestic markets.
Step added that net debt to EBITDA multiples in the FTSE 250 are 1.3x, compared to 2.5x for FTSE 100 companies, meaning UK mid-cap firms were carrying significantly less debt than their large-cap peers, while policies of reinvestment have driven strong capital gains in the FTSE 250.