Is the slump over for U.K. mid and small caps?
Why did mid-caps and small-caps fall considerably more than large caps in the February-March sell-off? No doubt risk and liquidity were factors – mid and small caps are regarded as higher risk so are dumped more readily than other investments during panics, and they are certainly less liquid which tends to accentuate moves – but the domestically-focused nature of the companies is undoubtedly a big factor. The FTSE 100 has more global companies with proportionately larger international earnings (Healthcare, Tobacco, Mining, etc.) whilst the FTSE 250 and Small Cap Indices have more Real Estate, Housebuilders and Pubs & Restaurants, and hence a greater dependency on the U.K. economy (which is expected to shrink by 25% in the second quarter). So not only do they have the immediate hit to the economy to contend with, but also renewed concerns about a ‘no-deal’ Brexit, which would also hold back U.K. growth.
Mid and small-caps outperformed large caps in the two weeks following the market low (19th March), but have not since. Given the extreme pessimism about the economy (and Brexit again), which we feel may be overdone, the balance of risk reward may (perversely) now be in their favour.