Case for buying mid-caps

A lot's happened in the past three weeks: Brexit, a new prime minister, the interest cut that never was. It makes deciding exactly how events are impacting, or may impact the stockmarket, sectors, or individual shares virtually impossible.

Investors have, however, been far keener to buy blue-chips than mid-caps, and we've talked at length about the weak pound favouring the international bias of FTSE 100 constituents and the safe-haven status of high-yielding defensives, like tobacco plays, pharmas, and utilities.

Second-tier stocks tend to make more of their money in the UK, which makes them vulnerable when sterling plunges. The pound hit a 31-year low post-Brexit. It's why the FTSE 250 still hasn't reclaimed its pre-Brexit levels whereas the FTSE 100 is up over 6% since 23 June.

But analysts at Berenberg think there are still plenty of investment opportunities, although they admit that "quality comes at a price".

"The average price/earnings (PE) ratio of companies not directly exposed to a negative Brexit impact is now at 17.9x, while the average PE of exposed companies is now 9.9x," notes the broker. "This has moved from 16.8x and 9.4x respectively on 30 June.

"We continue to believe that while a recessionary scenario will have a number of indirect effects on those companies that are seemingly limited in their direct Brexit exposure, there are certain stocks which should offer more defensiveness and resilience in uncertain economic times."

It's why Berenberg has recently upgraded funeral director Dignity and car dealer Inchcape to 'buy' and repeated 'buy' advice for Safestore, Domino's Pizza and Cineworld.

"At the smaller end, we also believe that Tyman has so far failed to see the foreign exchange benefit reflected in stock performance (unlike construction peer Keller, which shares a similar geographic exposure to Tyman) and also believe that Volution has been unfairly discounted back despite the international diversification now within its business model," writes the broker.

It also continues to rate veterinary services firm CVS highly, down 12% since 23 June, while car dealer Lookers is seriously lagging the recovery at peer Pendragon.

If it's income you're after, Connect Group (2016 yield of 6.4%), Plus500 (7.5% yield), Telecom Plus (4.7%) and Britvic (3.8%) are "potentially interesting".

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.