UK Midcap Stocks and the Pound*
We think UK midcap stocks (FTSE 250) could do well this year, despite looming recession risk. The Bank of England is expected to raise rates a few more times in this cycle but the turmoil of the (brief) Truss regime is no longer dragging on UK investment sentiment. The BoE rate hikes may pause in H2 2023 as they will want to examine what the effect of previous hikes has been on inflation. The turn higher in the GBP/USD from $1.0380 (September 2022) to $1.2200 now partially reflects the improved prospects for the UK economy in a post-Truss era as well as market expectations that the Fed rate hike cycle may peak this year. We see a real prospect of GBP climbing above $1.30 in 2023, and for investment flow into the FTSE midcap index to build, potentially back to the 2021 highs. The iShares ETF (MIDD) below is an example of the FTSE 250 index, and the rally above the 50-week moving average underlines the improvement here.