In the past two months, the broader 250 index has gained 7 per cent, rising past 5,900 points, while the benchmark 100 index has declined 2 per cent to below 5,880 points.
The factor driving the broader index's huge gains is the strength of the pound which, in the past eight weeks, has pared its gains against the currencies of the UK's main trading partners to 25 per cent, from 30 per cent. That is spurring the hopes of British exporters, who have recently seen the price of their goods in overseas markets soar.
"Currencies have had a big impact," said Paul Maguire, a fund manager with Lincoln Investment Management. "The mid-cap industrials are more export-oriented than the big industrials; they benefit proportionally more from weak sterling."
Waxing and waning bid and merger speculation has rocked the FT-SE 100 index, driving some investors out of the bigger stocks and into those companies in the mid-capitalised index that have survived the worst effects of the strong pound but still managed to turn in strong earnings growth.
The last time the values of the 250 and 100 indexes crossed, Britain was preparing to go to the polls to vote for a new government. On 6 May last year, when the 250 index value slipped lower than that of the 100, the pound was at 2.8162 against the mark - a five-year high.
That cut into the profits of exporters, with foreign sales worth less when converted back to sterling. Worse was to come, with sterling peaking at DM3.1102 on 31 March. Since then, the pound has weakened more than 20 pfennig against the mark, boosting the mid-cap exporters who stand to gain from favourable exchange rates and the renewed growth in western European economies.
Companies such as RMC, for example, a concrete supplier that makes a third of its sales in Germany, have helped the 250 outstrip the benchmark index. RMC has gained 16 per cent in the past two months, currently trading at about 1,155.5p.
"We're trying to look at the UK and Europe as one market," said Simon Toynbee, a fund manager at Majedie Investments. "RMC hitched its wagons to Germany," he said. And since the German housing market has picked up, so has RMC's.
As well as being clobbered by sterling's strength, exporters had been beaten up by five increases in official interest rates last year, with rates at a five-year high of 7.25 per cent. "Some of the stocks were so bombed out, and any interest at all in them had a big effect," said Mr Maguire.
The 100 index has been further undermined as more bid and merger link- ups failed than were completed. Glaxo Wellcome failed to merge with SmithKline Beecham, while spec- ulation of alliances in the banking industry has yet to yield a result. Thirteen of the FT-SE 100 stocks are banks. "Some of the biggest funds went a bundle on the mergers and acquisition talk," said Mr Toynbee. "It was a bit embarrassing."
At the same time, oil companies in the FT-SE 100 were hammered by the lowest oil prices in a decade. World oil prices slumped 44 per cent in the six months from October 1997, dragging down BP and Shell. Lower fuel costs, though, helped industrials - during the past year, the price that manufacturers pay for raw materials and fuel has fallen on a yearly basis at a rate of about 9 per cent. Some of the fastest-growing companies, such as Misys, which supplies software solutions to industry, have mushroomed so fast they are knocking at the door of the 100 index.
Misys, whose shares have soared 120 per cent in six months to 3,577p, has actuallly just been promoted to the 100 index, having grown to be the biggest capitalised company in the 250, just a decade after it was first listed.
While US-based technology companies have been hurt by their exposure to slowing Asian demand, in the UK it is the big banks that have been hardest hit. HSBC Holdings, Standard Chartered, and Schroders have all suffered from exposure to the Asian economic turmoil.
Schroders, the UK's biggest independent merchant bank, axed 220 jobs from its Asian operations. Together with charges against exposure to potential losses, this cutback resulted in a pounds 32m charge and dented second-half profits.
Still, investors do not expect a wholesale flood out of the big-cap stocks. "If you're a California pension fund, let's face it, you're not going to buy a 250 stock," said Mr Toynbee.
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