The FTSE 250 index is beating the FTSE 100 hands down. Here’s why

The FTSE 250 index has promising prospects as the UK economy improves. Here are three stocks that Manika Premsingh will buy now.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

As the stock market rally continued, the FTSE 250 index crossed 22,000 earlier this month. The past week was bumpy, but it has managed to hold on to these levels. 

This in itself is encouraging to me.

And there are more positives to the FTSE 250’s performance. In April so far, it has risen by 4.3% on average compared to March. By comparison, the FTSE 100 index rose by a smaller 2.9%. 

The FTSE 250 index’s bounce back from last year’s stock market crash has also been sharper. It has increased by 42.5% from April 2020. The FTSE 100 index has shown less than half that improvement of 20.6%. 

Why is the FTSE 250 index rallying?

I think there are two reasons for this. 

One, the FTSE 100 index includes some of the biggest global companies, but the FTSE 250 index adds UK-focused companies to the list. The UK economy’s prospects are looking quite good right now, making investors bullish about the index. 

Two, it is also for this reason that the FTSE 250 was hit harder. This, however, has contributed to a base effect. Let me explain this in some detail.

As the UK and EU struck a last minute Brexit deal, the stock markets saw a relief rally at the end of December 2019. But the euphoria was short-lived as the corona crisis led to the stock market crash.

Already just out of a sustained time of uncertainty, the crisis also resulted in loss of investor confidence in UK’s companies. This showed up in continued weakness in FTSE 250 in April last year. In March last year, the index fell more than the FTSE 100. 

Stock markets can be leading indicators for economic data, and at least in this case they did prove prescient. In the months that followed, it was revealed that in terms of economic contraction, the UK was indeed among the worst affected countries. 

As a result, while the FTSE 100 index stabilised last April from the previous month’s stock market crash, the FTSE 250 index fell further by 2%. However, because of this, the base-effect works in favour of April numbers this year, making the index’s growth appear higher. The base-effect wears off from next month onwards.

But I reckon that the FTSE 250 index will continue to strengthen as economic conditions improve.

What I’d buy now

Even though FTSE 250 stocks have run up a fair bit in anticipation of better times already, I think there are still a number of quality UK shares available at reasonable prices. 

Three I like and wrote about last week are iron-ore miner Ferrexpo, movie theatre chain Cineworld, and UK Commercial Property Real Estate Investment Trust

Ferrexpo is unique in how low its price-to-earnings (P/E) ratio is at around 5 times, even with good prospects for industrial commodities. It is vulnerable to commodity cycles, however. 

I like Cineworld for its potential when cinemas reopen. It will be positively impacted by pent-up consumer demand, though it is highly indebted.

The UK Commercial Property Real Estate Investment Trust has a promising strategy. I would wait for its next results update before buying the stock if I wanted to be doubly sure, though. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Manika Premsingh 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »