UK Midcap Outperformance Amid Geopolitical Shifts: Why FTSE 250 is Leading the Charge

The FTSE 250 index has surged ahead of its blue-chip counterpart, the FTSE 100, in Q2 2025, driven by sectoral and macroeconomic divergences that underscore the resilience of UK midcap companies. While the FTSE 100 grapples with global commodity volatility and geopolitical headwinds, the FTSE 250—dominated by domestically focused firms—is benefiting from tariff resolutions, UK economic recovery signals, and attractive valuations. This article explores why investors should overweight UK midcaps for Q3 2025.

Sectoral Divergences: Global vs. Domestic Exposure

The FTSE 100's heavy reliance on internationally oriented sectors—such as Energy, Industrials, and Healthcare—has left it exposed to geopolitical and commodity market turbulence. For instance, the Energy sector, which accounts for 10–20% of the index, faces volatility tied to Middle East conflicts and oil price swings. Meanwhile, Healthcare's underperformance—driven by sector-specific challenges like pricing pressures—has further constrained gains.

In contrast, the FTSE 250's sectoral composition prioritizes domestic resilience. Financials dominate at 45% of the index, while industrials and consumer-facing sectors like retail and leisure are more heavily weighted than in the FTSE 100. This focus on UK-centric businesses insulates the index from global trade disruptions. For example, the recent U.S.-UK tariff agreement, which removed duties on aerospace and defense exports, boosted Rolls-Royce shares by 1.4% in May. Such sector-specific tailwinds are absent in the FTSE 100, where only 10% of revenue comes from the U.S.

Macroeconomic Resilience: Domestic Growth Drivers

The FTSE 250's 43% domestic revenue exposure aligns it with UK economic recovery signals. Improving GDP growth and falling interest rates—projected to drop to 4.5% by year-end—support consumer-facing sectors like retail and hospitality. For instance, B&M European Retail, a FTSE 250 constituent, reported 7% sales growth in Q2, fueled by its discount model and strong UK consumer demand.

Conversely, the FTSE 100's global revenue streams (30% U.S.-derived) leave it vulnerable to U.S. dollar strength and geopolitical risks. Energy firms like BP face headwinds from shale oil competition, while pharmaceuticals grapple with patent expirations.

Valuation Advantage: FTSE 250's Undiscovered Value

The FTSE 250 trades at a cyclically adjusted P/E (CAPE) ratio of 17, nearly 23% below its 30-year average of 22. This undervaluation contrasts sharply with the FTSE 100's CAPE of 15.6, which is already near its long-term average.

Key midcap stocks offer compelling valuations:
- Safestore Holdings (SAFE) trades at a P/E of 9.5, down from 13 in 2023, despite its 5.2% dividend yield.
- Land Securities (LAND), a commercial real estate firm, trades at a 36% discount to net asset value, offering a 6.9% yield.
- Burberry, now in the FTSE 250, surged 73% in two months after cost-cutting and brand revitalization efforts.

Investment Thesis: Overweight FTSE 250 for Q3 2025

The FTSE 250's valuation discount, sectoral tailwinds, and domestic growth drivers make it a compelling overweight play for Q3:
1. CAPE Reversion: A return to its historical CAPE of 22 implies a 38% upside to its Q2 close of 20,500.
2. Dividend & Buybacks: Midcaps offer a 4% average dividend yield, bolstered by £56.5B in 2024 buybacks.
3. Sector-Specific Catalysts: Aerospace/defense gains from tariff resolutions, and retail/consumer recovery from falling UK interest rates.

Caution is warranted for the FTSE 100, where 25% exposure to volatile Financials and Energy's commodity risks could amplify losses in a downturn.

Conclusion

The FTSE 250's domestic focus and undervalued status position it to capitalize on UK economic recovery and sector-specific tailwinds. Investors seeking stability amid geopolitical uncertainty should overweight midcaps, particularly in Financials, consumer staples, and defense. While the FTSE 100 remains a global dividend play, its vulnerability to commodity and healthcare headwinds makes it less attractive for aggressive growth investors.

For Q3 2025, allocate 50–70% of equity exposure to FTSE 250-linked ETFs or midcap stocks with CAPE below their historical averages. Monitor U.S.-UK trade developments and UK inflation trends closely for further catalysts.