Neptune's head of UK equities, Mark Martin, discusses the UK mid cap opportunity post-Brexit vote, July 2016

While the UK stock market overall has rebounded after a few days of turmoil following the Brexit outcome in June's referendum, underneath the surface a few different themes are emerging.

One key event has been the significant underperformance of mid-cap stocks compared to the UK's largest companies. The FTSE 250 (which includes mid-caps) is at an all-time low relative to the FTSE 100 index*, with medium-sized, more domestic-focused companies predicted to struggle if the UK economy slows as forecast. Areas of concern include housebuilders, real estate, leisure financial services and general retail.

Where prices fall, however, true investors know that pockets of opportunity may also open up. Mark Martin, head of UK equities at Neptune and manager of the Neptune UK Mid Cap fund, tells us four things you need to know about mid-cap stocks post-Brexit.

1. More attractive valuations

“The FTSE 250 is now at its cheapest level since February 2013 and its valuation currently represents a 24% discount compared to late 2015^.

“Both small and mid caps de-rated in the months leading up to the vote in spite of consensus earnings upgrades. Further volatility is likely in the short-tern, but UK mid caps are, in our view, more attractively valued than they have been for some time.”

2. Significant exposure to global growth themes

“The FTSE 250 is often viewed as the domestically-focused index. While this is certainly the case relative to the FTSE 100, it’s important to remember that more than 50% of mid-cap earnings come from abroad. Many mid-cap companies that derive the bulk of their earnings from overseas have been caught in the crossfire in recent days. For example, Genus, which derives the vast majority of its revenues from outside the UK, has fallen by 6% since the result and almost 12% in the last two months.

“While the Brexit vote is likely to have a negative impact on GDP [gross domestic product] growth in the short term, the picture is brighter internationally.”

3. Potential merger and acquisition activity

“While the decision to leave the EU will take its toll on corporate activity in some cases, the effect of recent currency moves has been to make sterling-denominated assets materially more attractive for overseas buyers, especially assets less exposed to the UK economy.

“As a result, we continue to expect merger and acquisition (M&A) activity to pick up for the remainder of 2016 and beyond – particularly now that valuations of many takeover targets are more attractive than they were previously.
“Even in the midst of uncertainty prior to the vote we saw a number of UK-listed companies finding themselves M&A targets. Swiss company Dätwyler Holdings’ approach of FTSE Small Cap company Premier Farnell and South African company Steinhoff’s bid for Poundland are just two examples.”

4. The UK economy still has strength

“There are still reasons to be optimistic about the UK economy. There has been an extended period of real wage growth in the UK, which has been bullish for consumer spending. In the lead up to the vote, consumer confidence remained strong, though the decision to leave is likely to have a detrimental effect in the short term.
“While we retain our long-held concerns over London house prices and the size of the current account deficit, we believe Mark Carney and the Bank of England stand ready to act aggressively if needs be. Monetary stimulus is likely to be highly accommodative in the short and medium term.”


*Rathbones, Investment Update, 1 July 2016
^Bloomberg data quoted by Neptune, forward P/E ratios, June 2016


Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Mark's views are his own and do not constitute financial advice.
Published on 05/07/2016

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