Since the market highs of late 2021, the FTSE 250 has suffered sustained macroeconomic volatility, falling almost 30% from November 2021 to October 2023. However, things seem to be picking up for the UK mid-cap index. In fact, its price has risen double digits in the last three months.
The primary driver behind this is that the UK economy seems to be steadying. Red-hot inflation figures have started to fall back to normal levels, and interest rates have been kept at a stable rate of 5.25% for the last few months. With this stability, UK businesses can plan ahead more effectively.
With this stability also comes more positive investor sentiment. While there is no way of predicting potential shocks to the market, there is a chance that this positive sentiment could translate to a fruitful year for the mid-cap market.
Quality UK businesses
The FTSE 250 includes the 250 largest UK companies by market-cap after the FTSE 100. On the whole, this means it is primarily comprised of good quality stocks. I am always on the hunt for quality businesses, and given the index is down almost 7% in the last 12 months, I think now could be a chance to buy these stocks for cheap.
It has risen by just 2% over the last five years. The FTSE 100, on the other hand, is up almost 8%. With mid-cap stocks lagging the market leaders, it reinforces my understanding that the shares might be undervalued.
How I would invest
It should be noted that recoveries can be just as volatile as downturns. This is especially the case in the early days when investor scepticism remains high. For this reason, I favour investment methods such as pound cost averaging. This is where I would drip-feed cash into FTSE shares each month instead of investing a lump sum figure. This helps me ride out month-to-month volatility.
I would also target high-yielding dividend stocks as it allows me to generate passive income. Not only is passive income great for increasing cash returns, but it also gives me scope to reinvest my earnings, to compound my returns.
One stock that I think fits this bill is ITV (LSE: ITV). ITV currently trades on a price-to-earnings ratio of 8.5, which is well below the FTSE 250 average of 12, and the FTSE 100 average of 14. In addition to this, the stock comes with a whopping 8.5% dividend. This is significantly higher than I would expect to earn in any savings account.
I do see some risks for ITV, such as intense competition from the likes of US competitors Netflix and Disney. However, given the established UK brand presence, cheap valuation, and hefty dividend, I think the stock could be a top FTSE 250 steal right now.
Of course, If I wanted to buy more FTSE 250 shares all under one investment, I could use an index tracker like the Vanguard FTSE 250 UCITS. Either way, if I had the spare cash, I would be considering buying now.
