FTSE 250: does Brexit even matter?

According to the chart below, the answer would be no. Figure 1 shows the spread between the FTSE 100 and the FTSE 250, which is at its widest ever level, and has bounced back sharply since the low after the EU Brexit vote in June 2016. This means that the FTSE 250 has been outperforming the UK's blue chip index, particularly since the start of February this year.

What does this chart tell us? It suggests that investors' may have overplayed the impact of Brexit on the UK's smaller index, hence why it has been playing catch-up with the FTSE 100 this year. Other factors that could make the FTSE 250 more attractive than the FTSE 100 right now include the FTSE 100's exposure to global market dynamics such as the decline in the oil price, geopolitical concerns, and the stalling in gains for the US indices since the start of February. In comparison, these factors have less of an impact on the FTSE 250, which may also explain its outperformance.

Where could we go from here?

Of course, when the charts suggest that we have reached extremes in terms of pricing then we could expect to see reversal of trend. If the economy does weaken during the Brexit negotiation process as many expect in the coming weeks, then we would expect see the FTSE 250 under-perform the FTSE 100 once more. Thus, the FTSE 250 could be at risk as we wait for the first reading of UK GDP next Friday 28th April, which is expected to show a sharp slowdown in quarterly growth from 0.7% in Q4 2016 to 0.4% in Q1.

If you think that this chart suggests that the FTSE 250's outperformance of the FTSE 100 is too stretched, then a relative value trade ahead of Q1 GDP could be worth a look.


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