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Why Brexit's backers think the scaremongers were wrong -- in one stock chart

MARKETWATCH 10:48 AM ET 2/24/2017

U.K.'s domestically focused FTSE 250 index hits new highs again this month

The FTSE 250 has been the U.K. stock gauge to watch if you want a sense of how the country's economy is handling the Brexit process.

Is everything going to be OK?

Yes, according to some analysts. They have said the fresh record closes notched this month by the domestically focused index show that Brexit fears were unfounded.

"The return to form of the FTSE 250 is the unraveling of 'Project Fear' in its plainest form," wrote Jasper Lawler, senior market analyst at London Capital Group, in a note earlier this month.

The term "Project Fear" was widely used last year by those campaigning for the U.K. to leave the European Union. Brexit's backers denounced predictions that abandoning the trade bloc would wreck the British economy, slapping the warnings with that label (http://www.marketwatch.com/story/5-arguments-why-uk-should-vote-for-a-brexit-and-5-against- 2016-04-29) and others such as "scaremongering."

Opinion:Brexit's real casualty -- reputations of economists who predicted doom (http://www.marketwatch.com/story/the- real-casualty-of-brexit-reputations-of-economists-who-predicted-doom-2016-08-24)

So it's no wonder the FTSE 250's latest show of strength is sparking some cheering.

The mid-cap gauge last scored a record close a week ago, and is still within striking distance of its recent peak, as shown in the chart above. The index is viewed as a decent way to judge the health of the U.K. economy because most of its components' sales derive from the British economy (http://www.marketwatch.com/story/ftse-250-leaps-toward-all-time- high-despite-the-pounds-slump-2016-10-04). Sales for companies in the U.K.'s big-cap benchmark -- the FTSE 100 -- largely come from overseas and benefit more from the pound's (http://www.marketwatch.com/story/impressed-by-the-dow- this-stock-market-has-performed-just-as-well-in-2016-2016-12-29) ongoing Brexit-driven weakness.

"There are still many big firms with large foreign operations in the FTSE 250, so it's not the best gauge of domestic sentiment," Lawler said. "Still, the resurgence of domestically dominated sectors such as retail and homebuilding across big- and mid-caps would suggest investors are comfortable investing in the U.K. again."

On the other hand, it may be too soon to sound the all clear. The EU's executive arm said earlier this month the impact from the Brexit vote in June had yet to be felt (http://www.marketwatch.com/story/uk-stocks-edge-up-to-fresh-4- week-high-2017-02-13). While the Brexit vote was eight months ago, the U.K. remains part of the EU, and it looks like the nation won't completely leave the bloc until March 2019 at the earliest (http://www.marketwatch.com/story/brexit- bill-works-its-way-through-parliament-what-to-watch-2017-02-01).

That assessment from the EU's executive arm -- not a disinterested party, of course -- also featured officials acknowledging the U.K. economy has shown resilience since the referendum. The European Commission said it expects the British economy's annual growth (http://www.marketwatch.com/story/uk-gdp-grows-06-in-fourth-quarter-2017-01-26-54851812) to slow to 1.5% in 2017, above its prior forecast for this year of just 1% growth, though still down from 2% in 2016.

What Theresa May and Marine Le Pen mean for the FTSE 250

Some upbeat economic readings, such as unemployment falling (http://www.marketwatch.com/story/uk-wage-growth- unexpectedly-slows-2017-02-15) (though wage growth has slowed), have helped drive the FTSE 250 higher, according to Lawler.

Prime Minister Theresa May's tack on Brexit has been another positive lately, he said.

"May's more transparent approach to Brexit has seen the pound stabilize, and investors rotate out of multinational shares and back into more U.K.-focused companies," he wrote.

Read:Brexit means leaving the EU's single market, says U.K. leader May (http://www.marketwatch.com/story/brexit-means- leaving-the-eus-single-market-says-uk-leader-may-2017-01-17)

And see:Why Theresa May is right to take a huge gamble on hard Brexit (http://www.marketwatch.com/story/why-theresa- may-is-right-to-take-a-huge-gamble-on-hard-brexit-2017-01-17)

Political uncertainty throughout continental Europe might be spurring buying, too.

The FTSE 250 in February managed to "post record highs five days in succession, as U.K. stocks appear to be becoming a haven from political concerns in Europe," wrote Michael Hewson (https://www.cmcmarkets.com/en-gb/news-and-analysis/new- records-for-the-us-as-global-optimism-improves), chief market analyst at CMC Markets UK.

Investors have been worrying about populist Marine Le Pen becoming France's next president, Greece's seemingly endless debt saga, and upcoming votes in the Netherlands, Germany and Italy.

Check out:Investors to bid adieu to French stocks on Le Pen's presidential prospects (http://www.marketwatch.com/ story/investors-bidding-adieu-to-french-stocks-as-le-pen-gains-in-polls-2017-02-21)

And read:6 ways Europe could trigger market turmoil in 2017 (http://www.marketwatch.com/story/6-ways-europe-could- trigger-market-turmoil-in-2017-2017-01-31)

Over the last 12 months, the FTSE 250 is up about 15%, while the FTSE 100 has gained 21% and the S&P 500 has advanced nearly 23%.

Bank of England Gov. Mark Carney is among those not that impressed by the FTSE 250, pointing out this month that it has underperformed (http://www.telegraph.co.uk/business/2017/02/21/ftse-100-tumbles-hsbc-reports-62pc-profit-plunge- french-business/) other stock indexes.

The pound is down 10% against the U.S. dollar over the last 12 months, and it's about 17% below $1.50, where it traded as Brits headed to the polls on June 23.

-Victor Reklaitis; 415-439-6400; [e-mail]


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