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FTSE 250 rallies to record high
UK mid cap index the FTSE 250 hit a new record this week – and analysts at investment bank Liberum say the rally could have further to run in a number of stocks.
The FTSE 250 went through its May 2015 peak on 4 October 2016, hitting 18,590 at the time of writing. But analysts at Liberum say increases in the index’s value may not be keeping up with earnings upgrades.
In September, for example, the index gained 1% but its price-to-earnings ratio declined from 15.5 to 15.2 over the month. A lower price-to-earnings (PE) ratio, other things being equal, indicates investors are receiving more value per pound invested.
Earnings estimates increased the most for UK domestic cyclical stocks, which includes housebuilders, banks and recruitment companies, at 4%, 6% and 4%, respectively.
Liberum analyst Sebastian Jory says falling interest rate expectations in the UK have led investors to bid up the prices of big dividend-paying stocks among the mid cap universe.
To avoid overpaying for dividend income, Jory sees opportunities in ‘quality income’ stocks. Liberum highlights a number of companies including payments specialist PayPoint (PAY) and ship broker Clarkson (CKN).
But Jory warns the FTSE 250’s forecast PE of 15.2 remains well above its long-term average. (WC)