With the Brexit issue finally resolved and the roll-out of Covid-19 vaccines continuing apace, hopes are building that a faster relaxation of lockdown conditions and social distancing restrictions could allow the UK economy to rebound.
And this could help the more domestically focused FTSE 250 to continue outperforming the blue-chip FTSE 100 index as it did in 2020, according to investment bank Jefferies.
Although the UK has struggled to contain the spread of the coronavirus and has seen one of the highest death rates in Europe – recently passing 100,000 – the largest vaccination programme in British history has succeeded in protecting a large portion of its most vulnerable age groups.
“With respect to the UK equity market and economy, the fact that the vaccination strategy has targeted at-risk groups first might mean that it may not be necessary to achieve herd immunity to end the pandemic and also to re-open the economy,” the bank’s analysts noted.
“Although the coronavirus is highly infectious, fortuitously, it has a low mortality rate – affecting the elderly more than any other cohort.
“Hence, once fewer at-risk people are affected and the healthcare system is no longer overwhelmed, there is an argument for re-opening the economy before awaiting herd immunity.”
Coupled with the resolution of Brexit, this should be positive for many of the more domestically orientated stocks – such as consumer services and financials – that make up the FTSE 250, the bank noted.
It said the FTSE 250 “should provide a decent picture for the roll-out of the vaccine as well as the re-opening of the economy”.
Performance of indices over 2020
Source: FE Analytics
Last year, the FTSE 250 made a loss of 4.55 per cent but this was a considerable outperformance of the blue-chip index, which was down by 11.55 per cent.
Performance of indices since first vaccine
Source: FE Analytics
And since the first vaccine was administered in the UK on 8 December 2020, the FTSE 250 has made a total return of 3.19 per cent compared with a 1.34 per cent loss for the FTSE 100.
News of viable Covid-19 vaccines has been positive for FTSE 250 stocks in general and the financials and consumer services sectors in particular, Jefferies’ analysts noted.
“It is interesting to note that the FTSE 250 financials full-year 2021 earnings revisions inflected positively almost at the same time as news of successful vaccines were announced in November,” they said.
“This confirms our view that the market would price-in a peaking in impairment charges for the banks and financial services as the vaccines were rolled out.
“Meanwhile, consumer services earnings revisions for 2021 have followed the trail of the social restriction announcements pretty accurately.”
However, the mid-cap index has also been buoyed by positive economic data, particularly around hirings, which the analysts said were “particularly encouraging”.
“Interestingly, as the working population begins to shrink, the total level of unemployment and the unemployment rate will likely be lower than had perhaps been anticipated during the recession and hence there may not be as much slack in the labour market as is being anticipated,” they said.
“Moreover, given the depth of the recession, the number of companies reporting recruitment difficulties is much less than during the global financial crisis.”
Furthermore, the analysts said that while data from the Bank of England showed investment intention by UK businesses remained weak due to concerns about the strength of the recovery, anecdotally they had heard from FTSE 250 clients that planned to reinstate investment plans if cash positions allowed.
“After a huge drop in earnings per share and dividend per share in 2020, there are signs of a decent turn-around in earnings,” they concluded. “The dividend cover of the FTSE 250 is one of the best globally.
“We remain bullish.”