Is the FTSE 250 outperforming the FTSE 100?
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Trading Features / Strategies from Simon Denham of Capital Spreads.
The doom mongers were out in force yesterday with Goldman Sachs and Wells Fargo to the fore using unusually strong language to describe investor expectations for the remainder of 2008. ‘Delusional’ is not normally the kind of language that an analyst will employ to describe what is, after all, his customer base. However it is easy to see how this could be deemed to be necessary if your prognosis is as bearish as theirs appear to be.
There is no doubt that there is a sense of trying to see the uplands at the end of the current weakness but at the moment, when the ‘R’ word has hardly even pushed its way into our consciousness, this does seem rather premature and investors do appear to be very sanguine as to any potential adverse valuations in their portfolios, especially in the US.
In the UK with just about every indicator you care to mention moving into the red warning zone the equity markets look to be defying gravity. This is, as with everything financial these days, an illusion for several reasons. In world terms, the value of UK equities has fallen dramatically as the pound has dropped (for a European or Far Eastern investor in British stocks their valuations are actually another 20% lower in local currency terms). Secondly, much of the income from top line FTSE companies comes from abroad where in many cases the current economic cycle is still booming along and in Sterling terms that means their revenues may have actually increased even though economic conditions worsened.
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When we focus on UK centric FTSE 100 stock the picture is much less positive. The retail and banking sectors are performing pretty poorly with many valuations languishing at a 50% discount compared to just eight months ago. The FTSE 250 is off almost 20% from last years highs whilst the senior index is currently ‘only’ about 13% lower. Given the much more home market based orientation of the FTSE 250 index this is not surprising. Having said that, if you take into account the appalling performance of the UK centric stock in the FTSE 100, it can be argued that either the FTSE 250 is out performing the major index or that many top line stocks have been well and truly oversold.
Which is which? Well that is, of course, where you pay your money and take your chance.
This morning sees Tesco, Debenhams and Burberry all give wildly differing results but with a little bit of thought we can wade through the detritus. Tesco’s bottom line numbers were better than expected and this will bolster investor hopes for the stock. The new business in the states, ‘Fresh and Easy’, has been curtailed for the time being but Tesco are big enough to plan long term for such an enterprise. The temporary slow down in the US makes it prudent to put expansion on hold for the time being. Outside the US sphere the remaining external markets are still growing very strongly. Burberry are still a designer name to be reckoned with across the globe (where growth is still strong) and only Debenhams can be seen to be suffering. Focused on an old model and stuck, for the vast majority of its sales, in the UK, any short term outlook is beginning to depend, in many analysts minds, on whether it survives the current slow down. This makes it now a speculative stock rather than a solid investment unit.
The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
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'Is the FTSE 250 outperforming the FTSE 100?' edited by SD, updated 15-Apr-08
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