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.
