Take a view on the UK with the FTSE 250

INVESTORS in the FTSE 100 have endured a difficult couple of months as heavyweight BP’s tumbling share price dragged the rest of the index down with it. But while the blue-chip index has lost almost 13 per cent since the middle of April, the FTSE 250 has fared a little better. It too has suffered a dip but has only shed 9.5 per cent.

However, the FTSE 100’s well-trumpeted saving grace is its international exposure, which should insulate it from the relatively weak UK economic situation.

The FTSE 250, on the other hand, is composed of businesses that are more focused on the UK and therefore may suffer from the sluggish domestic demand forecast for the years ahead. David Jones, chief market strategist at IG Index, says that austerity policies may well hinder progress and add to the negativity.

While the FTSE 250 closed on Friday at 9,630.22, Jones says that the big support level that spread betters should be watching out for is the 8,950-9,000 area. This marks the index’s lows that were hit in February and which were unsuccessfully tested in May. “There’s a fair bit of stability at these levels but if the index slipped much below there, then it would start to look quite negative. But it is difficult to say definitively because so much of the market sentiment has changed in recent months,” he adds.

The good news for spread betters is that the daily moves on the FTSE 250 tend to be greater in terms of points than the FTSE 100 – Thursday, for example, saw a 125 range on the blue-chip compared to a 150 point range on the FTSE 250. However, the bad news is that low liquidity in the FTSE 250 index and futures market has deterred many spread betting companies from offering the market to clients.

Those that do tend to impose a wide spread to compensate for the lack of liquidity and the difficulties they face in hedging large volumes – IG Index’s spread is 44 points. Consequently, anybody who does want to take a punt on moves in the overall index needs to have a medium-term target if they want the trade to be a profitable one. It’s certainly not an index for day traders. But Jones says that rather than trading the FTSE 250 index, most clients prefer to focus on individual stocks, which are much more liquid and consequently have much tighter spreads.

But one FTSE 250 stock that has been tipped to do quite well in the coming months is outsourcing firm Xchanging, which is currently trading at just above 200p. Not only should it do well from government contracts, it announced last week that it has entered into an enterprise partnership agreement with SIA-SSB, a European financial and payment systems services provider. Seymour Pierce analyst Kevin Lapwood said: “This is good news since it is exactly the sort of large outsourcing deal that the market had almost given up on seeing from Xchanging.” He reiterated his Buy rating with a target of 250p.

Britvic, the soft drinks maker which derives most of its revenues from Britain, is another firm that is likely to do well; its products are proving successful in the age of austerity. By picking FTSE 250 stocks, you can take a view on their prospects as well as specifically target the UK economy.

FTSE 250 firm Kesa Electricals has had a difficult time since last summer when its share price began its dip below the FTSE All-Share average. Although the group’s foreign wing, Darty France, brings in most of the revenues, it is the poor performance of Comet in the UK that has been giving investors pause – perhaps unsurprising given sluggish consumer appetite for big white goods and electronics purchases. But Kesa’s results last week gave the company a boost with Comet’s profits up and overall pre-tax profits for the group up 18 per cent to £81.9m. The dividend yield also increased 18 per cent to 5.9 per cent. Total sales were up 3.4 per cent to £5.124bn – a slower growth than some had expected but, alongside significant cost reductions, nonetheless delivering profits ahead of company guidance. With broadly positive analyses from BNP Paribas and Bank of America Merrill Lynch in the wake of these results being announced, its P/E ratio is now at 15.2 times. Forecasts for its future hinge primarily on one’s view of the European retail sector as a whole: while Darty France could continue to perform well, the environment for Comet is only going to get tougher after the Budget’s 2.5 per cent VAT rise.

Juliet Samuel