The FTSE 250 has been a bit of a disappointment over the last decade. Historically, over the long run, the UK growth index has delivered returns of around 11% a year. Sadly, in recent years, it’s struggled to keep up with the FTSE 100, delivering barely 6% annually. However, that might all be about to change.
Analysts at UBS are increasingly bullish about the potential returns lurking in 2025 for the FTSE 250, citing multiple macroeconomic tailwinds that could propel the index to new highs!
The growth potential
Relative to international stocks, FTSE 250 shares are priced very cheaply. British investors have always been more conservative compared to Americans. However, there’s a growing consensus that the market might have become too cautious, especially with a lot of new catalysts potentially lying in wait.
Let’s start with the impact of a new Trump Presidency. His international tariff plans are all over the headlines. Yet while that creates headaches for large multi-national corporations, it’s less of a problem for locally-oriented small- and mid-cap stocks in the FTSE 250. As such, UBS predicts these may be far more resilient to the impact of tightening US trade policies.
Then there’s the upcoming predicted GDP growth for the UK, which is expected to reach 2% in 2025 and deliver a total expansion of 8.2% by 2028, according to the OBR.
UBS analysts believe FTSE 250 stocks are better positioned to capitalise on this, citing that “even modest GDP growth can drive meaningful returns”. And to take things further, the UK government has allocated over £100bn to invest across the energy, infrastructure, homebuilding, and healthcare sectors, creating plenty of new growth opportunities for UK-focused mid-cap stocks.
Pairing all that with the economic stimulus of interest rate cuts from the Bank of England, today’s relatively low valuation looks like an attractive entry point for long-term investors.
What to buy?
UBS’s prediction of a FTSE 250 surge is dependent on the government hitting its economic milestones. Sadly, that’s not guaranteed. As such, this segment of the stock market may fail to deliver robust returns next year. But let’s be optimistic and assume everything goes according to plan. Which stocks should investors consider buying?
One stock from my portfolio I believe shows promise is Kainos Group (LSE:KNOS). The digitalisation specialist has been hit with a lot of headwinds, due to economic and political uncertainty. With a good chunk of its business originating from the public sector, the spending slowdown triggered by the 2024 election has caused growth to suffer.
However, now that the government’s Budget is out and begins to execute its investment plan, market conditions for Kainos could improve drastically next year. And if growth returns in full swing, it’s currently discounted valuation looks like a buying opportunity, in my opinion.
Of course, Kainos isn’t the only business that’s chasing this opportunity. The firm has to fend off fierce competition from the likes of Softcat and Computacenter. Should it lose new public sector contracts to its rivals, growth may fall short of expectations, as could the share price.
Nevertheless, given the FTSE 250 stock’s track record, this is a risk I feel is worth taking. That’s why I’ve already started topping up my existing position.
This post was originally published on Motley Fool
