The FTSE 250 has experienced an unpleasant August thus far, with the index having now fallen by 6.5% year-to-date to 17,899 points. While this is far above the 16,611 point low of October 2022, it’s also a big drop from the 20,615 points of early February 2023.

For context, the UK’s domestically focused index has been relatively volatile this year, perhaps reflecting the wider volatility within the UK economy. Importantly, CPI inflation fell to 6.8% in the year to July, down from 7.9% in June. And with the Bank of England still predicting that this crucial measure will fall to 5% by the end of 2023, this is clearly good news.

But this most recent reading masks some potentially worrying trends. Leisure inflation — a good measure of consumer discretionary demand — increased. Services inflation rose to 7.4%, a 30-year record high. And the all-important core inflation metric remained sticky at 6.9%.

The picture is complicated by mixed news out of the ‘real’ economy. Companies from Thames Water to Wilko are under serious financial pressure — but others including Marks & Spencer are doing far better than expected.

This reflects the complex data underlying UK corporate income; wages including bonuses rose by 8.2% in June, the fastest rate of growth since records began in 2001 — meaning wage growth is now above inflation. On the other hand, retail sales fell by a hefty 1.2% in July underscoring the reality that wages have some time to catch up to the inflation of the past two years.

Overall, the markets are expecting the base rate to now peak at 6% — but these predictions seem to change with the winds. It was only a few short weeks ago that Schroders was predicting a terminal rate of 6.5%, and JP Morgan even speculating that it could reach as high as 7%.

But where there’s uncertainty, there’s often opportunity. But remember, past performance is not an indicator of future returns.

Best FTSE 250 shares to watch

1. Marks & Spencer

Under the transformational leadership of CEO Stuart Machin, Marks & Spencer Group has gone from strength to strength in 2023. The FTSE 250 company increased its profits guidance last week after declaring a period of ‘strong trading.’

Over the past 19 weeks, food sales have risen by 11% while clothing and homeware is up by over 6%. And the company is selling more items at full price, in stark contrast to competitors who are in the throes of price cuts. The only recent cloud is that chief digital and technology officer Jeremy Pee — who only started in January — is leaving to return to Canada.

Regaining its place in the FTSE 100 is now on the cards, with the FTSE 250 stock up 73% year-to-date to 219p. For context, annual revenues came in at £11.9 billion in May, a full £1 billion higher than in the prior full year.

As a caveat, it’s worth considering that the tighter monetary environment may make achieving growth less complex than maintaining it.

2. Crest Nicholson

Crest Nicholson issued in some ways the opposite guidance to investors this morning, warning that full-year adjusted profit before tax is now expected to be circa £50 million, down from analyst expectations of £73 million. Shares have fallen by 8.3% today, and are now close to their pandemic crash low, at 178p.

The mid-tier housebuilder blamed the ‘poor trading environment’ and legacy costs at its Brightwells Yard development — with its sales rate per outlet per week falling to just 0.25 in the 7 weeks to August 18, down from 0.50 in the first half. And the FTSE 250 company does not expect any material improvement before the end of October.

Further, while it’s negotiating bulk land deals to support future delivery volumes, management is actively reducing overheads and scaling back growth plans. For context, Rightmove data shows that UK asking prices fell by 1.9% month-on-month in the five weeks to 12 August.

But with Help to Buy now over, mortgage rates peaking, and the likelihood of further stimulus slim, it might be the case that much of the headwinds is now priced in.

It’s worth noting that average house prices are still circa 20% higher than pre-pandemic. Crest retains a strong financial position, plans to pay the dividend as usual, and boasts experienced leadership used to the cyclical nature of the housing market.

3. ABRDN

ABRDN shares have fallen by 56% over the past five years, and 30% over the past month alone, with many analysts blaming a botched rebrand alongside nimbler competitors. In recent half-year results, the investment management company saw net outflows of £4.4 billion, with the investor reaction perhaps to be expected.

However, the FTSE 250 company may now be appealing to value investors. There’s still £496 billion of assets under management (AUM0 to consider, alongside a dividend yield of 9%. If you compare the fundamentals to its competitors, ABRDN may be considered oversold — though it’s worth observing that the interim dividend of 7.3p is only just covered, at 1x adjusted capital generation.

But on the bright side, adjusted operating profit rose by 10% to £127 million, while adjusted capital generation also increased by 33% to £142 million. IFRS losses before tax came in at £169 million, but much of this can be accounted for by a £181 million reduction in the value of shares in companies on its balance sheet — and these paper losses could well be recovered over the longer term.

The key point is that the company is cyclical; with interest rates comparatively high, cash is currently attractive compared to ABRDN’s asset management returns. When — or if — rates start to fall, a strong recovery could be in the works.

 

 

 

 

 

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.