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The FTSE 100 and FTSE 250: What’s next?

After recording highly disappointing performances in the second half of 2018, the FTSE 100 and FTSE 250 have both made strong starts to 2019. They’ve risen by 12% apiece since the start of the year, with a number of shares delivering high returns in a short space of time.

Of course, stock markets don’t generally move in one direction over the long run. Therefore, could there be a pullback ahead for either index? Or, are further improving returns set to be recorded during the remainder of 2019?

FTSE 100

As an internationally-focused index, the FTSE 100 is more dependent on the prospects for the world economy rather than the outlook for the UK. As such, the relationship between the US and China could have a significant impact on its performance, since further tariffs between the world’s two largest economies could cause a downgrade to global economic growth forecasts.

Other risks include the general slowdown in the rate of China’s GDP growth, while poor retail sales and jobs growth figures from the US suggest that the strength from the two economies of the last couple of years may not last over the long run.

As such, it would be unsurprising for there to be increasing caution among investors over the remainder of 2019. This may mean defensive shares outperform their cyclical peers – especially since their valuations may be relatively low after a decade-long bull market when growth shares have been more popular.

Over the long run though, the FTSE 100 still seems to offer growth potential. Its dividend yield of around 4% suggests it has a wide margin of safety. As such, there may be short-term uncertainty, but long-term growth could also be ahead.

FTSE 250

Since the majority of the FTSE 250’s income is generated within the UK, it’s likely to be impacted to a large extent by the outcome of Brexit. At the time of writing, this is almost impossible to accurately predict. Therefore it would be unsurprising for investors to demand a wider margin of safety within the mid-cap index in order to compensate them for the high level of uncertainty which may be present over future months.

Since the FTSE 250 already has a dividend yield of around 3%, it appears to offer good value for money at present. Its yield is above its long-term average, which suggests there could be growth potential on offer. And with a number of mid-cap stocks forecast to post improving financial performances over the medium term, now could prove to be an opportune moment to buy them while they include margins of safety.

Verdict

With the FTSE 250 having significantly outperformed the FTSE 100 over the last 20 years, with its total annualised returns being 9%, versus 4.5% for the large-cap index, it appears to offer superior long-term prospects. While potentially more volatile in the short run due to Brexit, it could be a superior option for growth investors, while the FTSE 100 could offer greater stability as well as a higher income return. Both indexes, though, appear to have bright long-term futures after their strong starts to 2019.

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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.