Two years on from our last review of the FTSE 350, and the dust has settled on many issues that were first emerging back then – only to be replaced by a new set of challenges. Corporate life in a post-pandemic world, for both the winners and losers of the past two years, means making tough assessments about how enduring virus-induced economic and social shifts will ultimately prove. Nor do these considerations exist in a vacuum: ‘lockdown stocks’ now have to contend not only with a potential mean reversion, but also with the prospect of greater competition from rivals looking to take their share of the spoils.
For UK plc, questions like these are complicated by a series of other issues, from high and rising input costs to tightening monetary policy, renewed pressures on the consumer, and continued supply chain problems.
Then there is Russia’s war with Ukraine. The conflict has sparked calls for a reassessment of one of the biggest investment trends of recent times – sustainable investing – and cooled the valuations of many associated stocks. But the behavioural shifts prompted by a changing climate won’t be so easily dislodged. The step change in UK electric vehicle sales over the past six months is evidence enough of that, and underlines the potential opportunities that lie ahead for innovators.
For now, defence and energy stocks are riding high, giving another boost to the FTSE 100 in the process. Large-caps have proved a good place to hide in recent months, as the index’s mix of financials, resources and other hitherto lowly-valued giants start to flourish. It’s been quite the turnaround: at the start of 2021, the index was trading on a price/earnings ratio of 18 times, compared with 31 times for the FTSE 250. Now, there is less than a percentage point between them.
That story has as much to do with mid-cap valuations cooling as it does with large-caps prospering. The prospect of rising interest rates, coupled with a deteriorating domestic economic outlook, has not been kind to many FTSE 250 mainstays. Yet the biggest risers of the past 12 months (see page 38 for both this list and more detailed stock screens) show there have been plenty of winners here too, from Investec (INVP) to Drax (DRX) and beyond.
And for all the uncertainty, both domestic markets remain keenly priced compared with their US counterparts. Many US companies – as well as private equity businesses – are continuing to look to the UK market for acquisitions, which should tell private investors all they need to know about the opportunity set. In the pages that follow, we share our thoughts on where the most value lies.