There is a curious trend in the UK’s stock markets right now. The FTSE 100 index is on the up and up. In the past month, it has made gains and even rose higher than 7,500. It has also largely continued to stay above this level. The FTSE 250 index, on the other hand, is headed in the opposite direction. It is down more than 3% in the past month as I write. When it started the year, it was close to 24,000. And after relatively few sessions in January, it has fallen below 23,000.
As an investor in multiple FTSE 250 stocks, I am now wondering just what is going on here.
Inflation’s rising
FTSE 250 stocks tend to be more UK-centric than those that are part of the FTSE 100, which is more globally-focused. So, domestic conditions in the UK may well be playing on investors’ minds. Inflation, in particular, is worrisome. The latest figure is high and it is expected to remain elevated through the year as well. I expect that there will be a lot of inflation references from FTSE 250 companies in their updates in 2022.
This could keep the index uncertain until such time that inflation comes under control. Moreover, considering that inflation is not just a domestic phenomenon, I think the trends in the FTSE 250 index could also indicate weakness in the FTSE 100 in the near future. It is not a given, of course, but I am keeping that possibility at the back of my mind.
Why I am optimistic for the FTSE 250 index
However, there are reasons for optimism too. I expect that there will be plenty of policy action to curb inflation this year. The Bank of England has already raised interest rates once and could do so again. Significantly, the US Federal Reserve, is also expected to increase interest rates at least a few times this year. This should bring runaway price rises under control over the course of the year.
Moreover, the economy is doing much better now than it was even a few months ago. This also makes me positive on the FTSE 250 index for 2022. The latest growth numbers, released just a few days ago, show that the UK economy is back to its pre-pandemic levels. And the growth is quite widely distributed, which reflects a healthy pick-up across segments and is not restricted to just one or two sectors.
What I’d do
In fact, even now, many FTSE 250 stocks are doing quite well. I can speak from the impact on my own portfolio. One example is the fast pick-up in Cineworld stock. But there are also travel stocks like National Express and easyJet. I reckon this is because of the light we can now see at the end of the Covid-19 tunnel, which is something to be positive about.
In sum, even though inflation is a risk to the FTSE 250 index for now, there are a lot of positives that could balance out its adverse impact. I would buy stocks from the index that I know have solid credentials and will continue to grow over time, despite inflation.
