The uncertain economic outlook for the UK at present may mean investors look to avoid the FTSE 250 and buy-to-let investments. After all, they could be negatively impacted – in the short term at least – by ongoing risks posed by Brexit and its impact on sentiment.
However, the FTSE 250 could deliver high returns in the long run. In many cases, its members’ valuations factor in the risks posed by Brexit. Furthermore, the index offers significant international exposure that could help to diversify an investor’s portfolio.
By contrast, buy-to-let investing may prove to be unfavourable due to a raft of tax changes and the prospects for higher mortgage costs over the medium term.
Risk reduction
Despite the FTSE 250 being considered a UK-focused index, in reality its constituents generate around half of their revenue from abroad. This provides the index with a degree of geographic diversity often overlooked by investors. It could mean it’s able to deliver improving capital returns, even if the UK economy has modest growth prospects of its own in the face of Brexit.
This could make it a more appealing investment opportunity than buy-to-let. It may be less susceptible to the performance of the UK economy at a time where the outcome of the Brexit process looks set to remain unclear over the coming weeks, and possibly months.
Moreover, it’s far easier to diversify among FTSE 250 shares than it is among buy-to-let properties. Buying a range of stocks that operate in a number of different sectors could mean that an investor is less exposed to difficulties in one specific industry or location, with the cost of doing so small in comparison to buying numerous properties.
Return potential
Since the FTSE 250 currently has a dividend yield of over 3%, it appears to offer a wide margin of safety. Many of its members’ valuations appear to include a discount that suggests investors are pricing in the prospect of an uncertain economic period for the UK, as well as for the world economy.
By contrast, property valuations in the UK continue to be high. Although in recent months some regions of the UK, such as London, have declined in price, they remain close to historic highs compared to average incomes. This could mean that there’s less scope for capital growth than there has been in the past, while the prospect of rising interest rates and changes to taxation may mean that the net returns available to property investors can diminish over time.
As such, now could be the right time to buy a range of undervalued FTSE 250 stocks, rather than consider the purchase of a buy-to-let. They may produce higher returns, as well as offer a reduced risk profile, given the current economic outlook.
