The market is currently going through an interesting period, with the FTSE All-Share enjoying a rare winning streak after underperforming for the best part of a year. There have also been notable developments across the cap spectrum: the FTSE 250 outperformed the FTSE 100 by seven percentage points over the final quarter of 2023, and while the large-cap index has regained its dominance this year, it should be noted that last year's rally was driven by the expectation of interest rate cuts.
With improving sentiment on the UK market maintained in 2024, and rate cuts potentially back on the agenda, attention has turned to whether investors should be looking seriously at undervalued shares in the mid- and small-cap segments as a way of rotating out of the increasingly overbought US growth story. According to S&P 500’s monthly data, technical indicators show that the market is overvalued somewhere in the range of 92 per cent to 154 per cent, depending on the metric.
A falling base rate could be the key to unlocking UK mid-caps' potential, as companies with a high correlation to the UK economy will benefit from lower rates in two ways. Firstly by paying less to service debt on their balance sheets and, secondly, because of the boost to economic growth and the increased cash available for consumers to spend.