Renewed divergence between the FTSE 100 and FTSE 250 will continue to the year-end as the China and commodity slumps play out, according to JPMorgan Asset Management’s William Meadon.
Mr Meadon, manager of the Claverhouse Investment Trust, said he expects the mid-cap index to reach a record high in the coming months, even as blue-chip companies struggle to cope with macro headwinds.
Both the FTSE 100 and FTSE 250 index hit record highs in the second quarter, above 7,100 and 18,200 respectively, but performance has diverged in recent months.
As of August 19 the blue-chip index had shed 1.5 per cent year to date, compared with an 8.8 per cent rise for the FTSE 250.
The sharp falls seen in recent days have sent both indices into the red, but the disparity remains: the FTSE 100 ended Monday August 24 down 10.2 per cent for the year, compared with a 1.1 per cent rise for the 250.
Speaking last week, Mr Meadon said: “The FTSE 100 is being weighed down by oil and commodity stocks which make up large parts of the index. These stocks will continue to suffer and so will the FTSE 100.”
UK blue-chip companies that make up the index have suffered from China’s stock market reversal, the devaluation of its currency and continued falls in commodity prices.
The manager said it is not just commodity-focused companies that are feeling the pinch. As well as luxury stocks, he is particularly worried about Standard Chartered and HSBC, as they have large portions of their businesses in East Asia, which makes them vulnerable.
Mr Meadon holds some of his portfolio in HSBC for “risk control”, but he has no exposure to Standard Chartered.
He expects the FTSE 100 will “not go up by much” when a rebound does emerge, given the complexities of slowing growth in China and a range of other geopolitical scenarios that could weigh on the index.
However, the manager says there are “a lot of exciting opportunities” in the FTSE 250, and believes merger and acquisition activity will generate more still.
Mr Meadon said: “Mergers and acquisitions are [still] at pre-crisis levels and I think they are going to accelerate further”.
One large cap the manager does like is Lloyds. He said: “Lloyds has done a lot to reform its business and we think it looks particularly attractive. It has the prospect of returning healthy dividends so I have a significant overweight position.”
The £451.9m trust’s preference for mid caps has helped returns. In the past three years it has returned 67.6 per cent, while its benchmark, the FTSE All-Share Index, returned just 38.3 per cent.
Mr Meadon attributed his more recent outperformance to his overweight in tobacco. British American Tobacco and Imperial Tobacco make up 7.3 per cent of his portfolio, and have prospered after a good set of results from the former.
The trust also benefited from its underweight to miners, as well as avoiding Rolls-Royce, which has just issued its fourth profit warning in 18 months.
