Robert Stephens, CFA, discusses the appeal of the FTSE 250 as the UK economy prepares to reopen.
The reopening of the UK economy could prompt investors to buy UK shares. After all, the end of Covid-19 containment measures may be the prelude to greater economic activity levels, as record savings from lockdown are spent across a wide range of industries.
Indeed, the IMF currently predicts that the UK will report a 5%+ rise in GDP in 2021 and in 2022. This is superior to the vast majority of other developed nations and suggests many UK-focused companies could experience improving financial performances.
FTSE 100 vs FTSE 250
Of course, it can be difficult to unearth FTSE 100 companies that rely on the UK for a large proportion of their sales. Indeed, around three-quarters of the revenue of the index’s members is generated from non-UK markets.
Therefore, it may be logical to instead look for UK-focused companies in the FTSE 250. Members of the mid-cap index generate around half of their revenue from the UK.
Furthermore, FTSE 250 shares have a far superior long-term track record of performance than the FTSE 100. Since the index’s inception in 1992, the FTSE 250 has posted an annualised capital gain of 8%. This is above the FTSE 100’s 5.5% annualised capital return since its inception in 1984.
Britvic (LON:BVIC) is a FTSE 250 share that could benefit from a reopening of the UK economy. The beverages company has experienced a challenging period during Covid-19, with falling consumption in the hospitality and on-the-go segments causing a 6% decline in underlying revenue in the first half of its current financial year.
However, the firm recently reported encouraging trading as lockdown measures have eased. It has also moved to simplify its operations, while making market share gains in the UK and other key countries such as Brazil. It has also engaged in M&A activity, while entering new product categories such as the energy drinks segment in the UK.
Trading on a forward price-earnings ratio of 23.5, Britvic could offer good value for money based on a forecast growth in earnings per share of around 30% next year.
Improving economic prospects
Another UK-focused stock that may offer capital growth potential is homewares retailer Dunelm (LON:DNLM). The FTSE 250-listed company has coped better than many retailers during Covid-19, with its pivot to e-commerce allowing it to deliver resilient sales and profitability.
Although the vast majority of Dunelm’s stores reopened in April, it could benefit from factors such as improving consumer sentiment. Indeed, UK consumer confidence is now at the same level as at the end of 2019. Moreover, an improving economic outlook, as well as record savings levels, may strengthen Dunelm’s financial performance.
Its forward price-earnings ratio of 26 is relatively high, but a forecast double-digit rise in earnings per share in each of the next two years could lead to share price growth.
The reopening of the UK economy could mean there is a swing from online sales to in-store sales, as consumers enjoy the novelty of shopping without restrictions.
However, FTSE 250-listed stocks such as warehouse and logistics business Tritax Big Box (LON:BBOX) may continue to enjoy rising demand for their services. It may benefit from a likely continuation in long-term trends towards digital retail, with the proportion of total UK retail sales conducted online rising from 7% in 2009 to 21% by 2019.
The lack of supply of warehouses and distribution centres could mean that Tritax Big Box is in a relatively strong position to experience rising rents. Its dividend yield of 3.5% suggests it offers a margin of safety and income potential at the present time.