The FTSE 100 jumped almost 2% in early trading following the news that Boris Johnson had won an unexpected landslide for the Conservative Party.
That looked good – until you saw the FTSE 250, which shot up an incredible 5% as investors dived in the moment markets opened.
Just look at it go!
Too many private investors make the mistake of overlooking the UK’s index of medium-sized companies, as they fixate on the big blue-chips, but in doing so they have missed out on strong outperformance. The FTSE 250 is up 52% measured over five years, with dividends reinvested, beating the FTSE 100’s 38% total gain.
Today, gains on the FTSE 100 have been tempered by the fact that its members generate an incredible three-quarters of their earnings overseas, primarily in US dollars. They like a weak pound, because it makes their products and services cheaper for foreigners to buy, and overseas earnings more generous when converted back into sterling.
It’s all down to the pound
The pound started regaining strength after Prime Minister Boris Johnson struck his deal with the EU, massively reducing the chance of a no-deal departure, and it shot up dramatically last night when the shock exit poll came in. I became dizzy watching its ascent.
Sterling has retreated slightly this morning, as investors who bought the rumour sold the fact, but I suspect its new found strength is here to stay. While that may restrain the FTSE 100, I’m not too concerned. If reports of a wall of overseas money – some have called it a tsunami – heading for the UK are proved correct, it will rise regardless.
If you are tempted by the FTSE 100, here are five stocks you might consider for a starter portfolio.
This is what I’d consider
I’m even more attracted to the FTSE 250 today. Stocks on this index generate far more of their earnings from domestic operations, therefore have less to fear from currency risk. In fact, a stronger pound should work in their favour, by reducing the cost of imported materials.
The FTSE 250 may trail slightly downwards as investors pocket their profits from this morning’s spike, but in the long term, the outlook is bright. You could buy the whole index with a low-cost tracker such as the iShares FTSE 250 UCITS ETF, or pick out some exciting individual stocks. There are plenty to choose from, including these three quality companies.
Trade talks next
While Brexit is far from done, some of the uncertainty has now lifted and investors have a better idea of what happens next. Johnson’s Withdrawal Agreement should be settled, and the UK will exit the EU on 31 January, for better or worse. The tricky part will be striking a trade deal, although the size of today’s majority could give Boris more room for manoeuvre, and maybe even allow him to negotiate a softer Brexit.
The UK stock market has been massively unloved both by domestic and overseas investors. That looks set to change. The strong pound will continue to underpin the FTSE 250 so it might be worth taking a good, close look at its prospects.