OMAM’s Watts: FTSE 250 to rise 15% this year

The FTSE 250 could rise a further 15% in 2011 despite surging more than 25% in 2010, said Old Mutual Asset Managers mid-cap specialist Richard Watts.

Watts, running the £900m UK Select Mid Cap fund, said analysts’ expectations for profit growth from the sector indicate a rise of 15% overall.

“There is no reason why that is not obtainable,” the manager said.

Watts said OMAM’s base case for global GDP growth tallies with analysts’ expectations of between 3.5% and 4% growth this year, and he said this, coupled with better than expected earnings from companies within the mid-cap sector, supports the case for a rise of 15%.

Last year mid caps extended a rally begun in 2009, with the FTSE 250 outperforming the FTSE 100 significantly, up 28% compared to a rise of 12% for the blue chip index.

So far this year mid caps have stayed out in front, with the index up 5% compared to a rise of 4% from the FTSE 100.

Watts said the drivers of last year’s outperformance – namely the exposure of mid-cap companies to economical growth globally, and the rise in M&A – remain intact and should support another strong year for mid caps.

“Our figures show 45% of the FTSE 250 is what we call internationally economically sensitive, compared to 35% of the FTSE 100,” he said.

“Therefore it will continue to react to the recovery of global growth, and a lot of the companies we hold are plays on that theme.”

Watts said his portfolio – which returned 16.3% in the last year compared to the IMA UK All Companies sector average of 11.8% – has about 70% in international plays, ahead of the benchmark weight within mid caps of 60%.

He also expects M&A to support the market as corporates continue to hoard cash.
“M&A activity in the FTSE 250 outstripped the FTSE 100 last year, with 13 bids in the mid-cap space compared to one in the FTSE 100,” he said.

“This year M&A has fallen back a bit but the fundamentals remain strong for it, with 30% of the FTSE 250 holding cash on their balances sheets, and this should fuel more M&A as shareholders pressure them to utilise that cash.”

As well as his international focus, Watts continues to invest in recovery plays within UK domestic positions.

He is holding a number of stocks, including recently-purchased Punch Taverns, where he sees potential for growth.

“I am taking the view the UK economy does not deteriorate from expectations and, in that environment, companies like Punch have the opportunity to benefit from self-help,” he said.