If there is one stock market index that has its pulse on the UK economy, that would be the FTSE 250. Unlike the more globalised FTSE 100 index, the FTSE 250’s constituent companies do a larger proportion of their business in the UK. The UK economy is slated to do well next year. This gives me an optimistic outlook for the index for 2022 from the word go.
The question asked in the title is very specific, though. Is the index likely to touch 25,000 in 2022? I think the answer could be attempted by considering a blend of macro conditions, company-specific factors, and what the trends tell us. The dominant macro factor, of course, is what happens next with the pandemic.
Sometimes I do get mildly jittery looking at the news. Last month, there was talk of a ‘firebreak lockdown’. And since virus transmission is stronger during winter months, media reports are suggesting that another lockdown is likely. It does not help that in Europe, Austria, has gone into full lockdown again. So far though, all appears to be going well in the UK. If things take a turn for the worse, then I doubt that the index will touch 25,000 any time in the near future.
Growth could support FTSE 250
But, if the pandemic stays under control and the economic recovery continues, I reckon that the index could rise to these levels. According to my calculations, based on the average growth rate for the current year, the FTSE 250 index could well reach the 25k level by the middle of next year. However, if the pace of growth were to halve, the index would reach these levels only by early 2023. And that could well happen. The stock markets got momentum this year from the relief rally that started last November as vaccines were developed. It might not continue much longer.
But markets could still get a fair bit of support from the performance of FTSE 250 companies. Consider the three biggest index stocks by market capitalisation. These are industrial and electronic products distributor Electrocomponents, veterinary medicines producer Dechra Pharmaceuticals, and kitchen products manufacturer and supplier Howden Joinery. All three have seen a rise in share prices over the past year. They have also performed well. I am optimistic in my outlook for all three.
No Brexit pullbacks
Besides this, the FTSE 250 index has also broken loose from a key constraint pulling it back for a long time. I am talking about Brexit, of course. The index saw a sharp increase as the Brexit deal was struck in December 2019, but the start of the pandemic soon after dragged it down again. Keeping all this in mind, I am inclined to believe that the index could indeed rise from here.
It might or might not rise to 25k in 2022, but I think chances are that it will keep rising. And for that reason I am buying FTSE 250 stocks now.
Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Howden Joinery Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.