Brexit is now only a matter of weeks away, and is therefore likely to dominate the UK’s political and economic landscape in the near term.
This may naturally cause investors to adopt a cautious attitude towards the FTSE 250, which is more dependent on the performance of the UK economy than the more internationally-focused FTSE 100.
However, with the FTSE 250 still being highly dependent on the global economic outlook, and it appearing to offer a wide margin of safety, now could be the right time to buy a range of mid-cap shares for the long term.
With the FTSE 250 currently having a dividend yield of around 3.2%, it appears to offer good value for money compared to its historic yield range. This suggests that while there is a risk that it experiences a period of volatility in the short run, its long-term value investing potential remains high.
In fact, a number of mid-cap shares currently trade on low valuations despite having upbeat growth forecasts. Certainly, the outcome of Brexit could have a positive or negative impact on their outlooks. But, with their valuations being relatively low, it appears as though investors may have priced in the prospect of difficult periods for a number of the index’s members.
Having reached an all-time high of over 21,000 points in June 2018, the FTSE 250 has experienced a challenging period. Since then, it has traded as low as around 17,400 points, with it currently still being around 10% below its record high.
Although it may take time to record a new all-time high, the index has a strong track record of doing so despite facing major recessions and bear markets. For example, following the financial crisis the index recovered from a decline of over 50% to produce strong growth. Therefore, even if Brexit has a negative impact on the UK economy, the index could trade significantly higher than its current price level over the long run.
Even though the FTSE 250 is more dependent on the UK economy’s performance than is the case for the FTSE 100, the mid-cap index generates around 50% of its income from outside of the UK. This means that it is likely to benefit from the growth prospects offered by emerging economies, which could act as a catalyst on its members’ financial outlooks.
The FTSE 250’s international exposure also reduces its risk through geographic diversification. This could mean that, while an uncertain outlook may be ahead, the index offers a favourable risk/reward opportunity for investors.
Although concerns surrounding Brexit may cause many investors to focus on the FTSE 100, since two-thirds of its income is generated outside of the UK, the FTSE 250 could offer better value for money. Given its track record of making higher highs and recovering from major recessions, the risks posed by Brexit may provide a buying opportunity for long-term investors as a result of the index’s low current valuation.
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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.