Norbert Van Veldhuizen
UK equities—especially mid-cap stocks—appear poised to benefit from structural tailwinds. Here we explore how pro-growth political policies and an easing interest rate cycle are elevating investor confidence and driving a liquidity uptick in FTSE 250 Index futures contracts.
- Political Stability and Growth Policies: The new Labour government’s pro-growth policies, such as public-private partnerships and planning reforms, are driving confidence in UK equities.
- FTSE 250 Liquidity Surge: In Q3 2024, traded volumes of FTSE 250 futures surged by 105%, reflecting growing market interest in mid-cap stocks with a domestic focus.
- Bank of England's Rate Cuts: The Bank of England's easing monetary policy, with another expected cut in November, has further boosted market sentiment, increasing investor activity in the FTSE 250.
Labour government initiatives could catalyze favorable change
The new Labour government has indicated a strong commitment to capitalising on positive signs in the UK economy and delivering sustainable growth. In recent comments at a G20 meeting, for example, Chancellor of the Exchequer Rachel Reeves presented a clear message to international leaders. “After years of uncertainty and instability, Britain is open for business once again. This new government’s number one mission is to boost economic growth so we can make every part of the country better off,” she stated.
The Labour government intends to support business through a stable policy environment. Cornerstone initiatives include new public-private partnerships—such as the National Wealth Fund—planning reform to support new home construction, and removal of the ban on onshore wind.
Bank of England dials down restrictive policy
Recent moves by the Bank of England have also improved sentiment surrounding UK businesses. In August, the central bank lowered its key rate by 25 basis points to 5%, cutting from a 16-year high. Many market participants are expecting another cut in November.
FTSE 250 Index futures: Growing confidence corresponds with liquidity uptick
Investors widely recognize the connections between political changes, monetary policy, and capital markets. The current situation in the UK presents an interesting opportunity to consider how a stable political landscape and easing monetary policy can foster innovation and investment. For instance, the Labour government's commitment to boosting productivity might not only lead to short-term gains in related investments—such as the FTSE 250 Index—but could also enhance the UK's competitiveness on a global scale, attracting foreign investment.
The FTSE 250 often functions as a gauge of health of the UK’s economy, both during periods of optimism and moments of crisis. Representing mid-cap stocks traded on the London Stock Exchange, the FTSE 250 has a distinct, domestic focus when compared to its sister benchmark, the well-known FTSE 100 Index of UK large-cap stocks. In recent years, as much as three-quarters of the earnings of FTSE 100 constituents has come from non-UK activities, whereas the figure for FTSE 250 is closer to 50%.
For investors looking to express views around the UK economy’s prospects, FTSE 250 futures contracts have grown in popularity as a potential solution. In Q3 2024, traded volume of ICE FTSE 250 Index futures reached 253,000 lots with an ADV of 3,900 lots, translating to year-over-year growth of approximately 105%. Open interest in July posted strong year-to-date growth of more than 166%, totaling 47,500 lots.
FTSE 250 Index Futures Monthly Volumes and Open interest
Source: ICE, June 2023-September 2024. Past performance is not a guide to future returns. Please see the end for important legal disclosures.
“As market participants look to dial in their UK exposure, we have seen a notable uptick in ICE’s FTSE 250 Index futures volumes,” said Franc Sportiello, head of equity derivatives at ICE . “ICE futures contracts are designed to be liquid, transparent, and capital efficient—important characteristics that enable investors to precisely control their equity risk profile in moments like this.”
Some investors turn to FTSE Index derivatives for exposure to the UK economy, but please note FTSE Russell does not distribute futures or options products. These products are listed for trading on exchanges. Please contact the exchange or your broker for more information.
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