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Are FTSE 100 and FTSE 250 stocks bargains or value traps?

With the FTSE 100 and FTSE 250 having made gains of around 14% apiece since the start of 2019, it may seem rather unlikely that both indexes contain a wide range of undervalued shares.

However, they continue to trade below their record highs. In fact, they have so far failed to fully recover from downturns in the second half of 2018.

While members of both indexes could experience an uncertain period due to the risks across the global economy, now could be an opportune moment for investors to buy a range of stocks for the long term.

FTSE 100

With the FTSE 100 being internationally-focused, it could deliver high levels of growth in the long run as a result of the improving prospects for the global economy.

Clearly, the present time is uncertain for a number of the world’s major economies. For example, the US and China have been engaged in a trade war that has increased in scale. This is expected to limit global GDP growth over the short term, which could produce less favourable operating conditions for some FTSE 100 companies.

However, with the index containing a number of stocks trading on valuations that are low compared to their historic levels, it seems to offer good value for money. For example, sectors such as banking, utilities and tobacco contain stocks that are expected to generate improving financial performance, and yet their valuations suggest investors are anticipating significant challenges ahead.

Therefore, while the index may yet experience a volatile period due to the risks faced by the global economy, the low valuations of many of its members could mean that now is a good time to buy them. The global economy continues to have a bright long-term future, with the US and China forecast to post impressive GDP growth that could catalyse FTSE 100 stocks’ profitability in the coming years.

FTSE 250

Although the FTSE 250 is a more UK-focused index than the FTSE 100, its members still depend on the world economy for a large portion of their sales growth and profitability. Therefore, mid-cap shares could be catalysed by continued growth in the world economy.

Of course, its greater UK focus may mean that Brexit has a more noticeable impact on the FTSE 250 when compared to large-cap stocks. In many cases, though, the prospect of an uncertain economic period for the UK has been priced in to mid-cap shares. Evidence can be seen in the valuations of many index members, which are low relative to their historic levels in many cases.

As such, now could be the right time for long-term investors to buy a range of mid-cap shares. History shows the most compelling periods to buy stocks are when the future is uncertain, since this provides investors with a wider margin of safety. While it may mean there is scope for paper losses in the short run, the FTSE 250’s track record of growth shows that it is likely to recover from any future economic downturn to post higher highs.

Takeaway

While there may be value traps in both the FTSE 100 and FTSE 250 at the present time, they appear to offer good value for money. Through buying a range of stocks across a variety of sectors, you can benefit from the wide margins of safety that are on offer in order to improve your long-term financial prospects.

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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.