Goldman Sachs (NYSE: GS) recently analyzed the FTSE 250’s performance, which has declined by 5% this year, lagging behind both the FTSE 100 and other European indices. Historically, the FTSE 250 consistently outperformed, especially in comparison to the less dynamic FTSE 100.
Between 2009 and 2021, FTSE 250 delivered an impressive 400% total return, while FTSE 100 only managed 170%.
However, FTSE 250’s momentum has waned in the past two years. Goldman attributes this slowdown to the struggling economy, highlighting that about half of FTSE 250’s sales are from the UK, compared to just a quarter for the FTSE 100. Adverse factors like rising inflation and interest rates have impacted the UK economy, and the FTSE 250’s trajectory closely follows PMIs, which have been subpar. Moreover, EPS for FTSE 250 has seen significant downward revisions, while FTSE 100 has gained from the strengthening dollar.
Another pain point for the FTSE 250 is the surge in bond yields, given its expectations for medium-term growth and its prolonged duration compared to the FTSE 100. The index also has a sizable exposure to rate-sensitive sectors like real estate. The lack of mergers and acquisitions, attributed to elevated bond yields and economic sluggishness, has further hampered corporate investment.
Goldman anticipates a shift in the situation no sooner than 2024. They mention that bond yields must stabilize and the economy must begin to recover before any major improvements are seen. The bank currently leans towards the FTSE 100, expecting higher interest rates and increased energy prices due to Middle Eastern conflicts. They also note the potential boost the FTSE 100 could receive from potential fiscal relaxations in China, given its ties with mining and banking sectors.
However, the UK’s economy isn’t faring well either, with unemployment rates rising. But Goldman believes that in the mid-term, the FTSE 250, with its attractive valuation, could be a promising option. The consensus forecasts a 7% sales growth and a 15% EPS growth in 2025 for the FTSE 250, compared to 1% and 7% for the FTSE 100.
The expected 2024 general elections introduce further volatility for assets focused on domestic markets. But, observations from recent political events indicate that both primary parties face financial constraints.
