The last few years haven’t been kind to the UK stock market and the FTSE 250, much like the FTSE 100, has fallen out of favour with all but the hardiest and most dedicated (or stubborn) UK investors.
Perhaps now is indeed the time to throw in the towel, sell everything UK-related and move the proceeds into everybody’s favourite index, the S&P 500.
On the other hand, two of the best-known investing maxims are to be greedy when others are fearful and to buy when there’s blood in the streets. If those statements are correct, and I think they are, then the deeply negative sentiment that surrounds the UK could be creating precisely the right conditions for outstanding future returns.
It’s impossible to know for sure, but we can draw some sensible conclusions by looking at the FTSE 250’s past, calculating its valuation multiples and forecasting (but not predicting) its future price.
How did the FTSE 250 perform in 2023?
We can only begin to understand the FTSE 250’s potential future by understanding its past, so let’s start there.
Although the last few years haven’t been kind to the UK stock market, 2023 wasn’t all that bad. The FTSE 250 gained a little over 4% during the year which, from a historical perspective, is fairly typical.
4% is a reasonable one-year capital gain, but as you can see from the chart above, there wasn’t any kind of upward trend during the year. Instead, the FTSE 250 went up a bit, it went down a bit and it just happened to end the year during a brief upswing.
On balance, I would describe the FTSE 250’s performance as broadly flat in 2023, and I’ve highlighted that trend in the chart with a big red arrow.
Of course, equities are long-term investments, so worrying too much about the ups and downs of the stock market over a single year is pointless at best and counterproductive at worst. Investing is all about the long-term, so here’s a chart showing the FTSE 250’s performance over the last five years.
Alas, the five-year chart is as depressingly flat as the one-year chart because the FTSE 250 has gained barely more than 10% since the end of 2018. This is disappointing, but it isn’t surprising as the last five years haven’t exactly been plain sailing for the UK economy.
However, while disappointing, this chart does contain an important lesson. The lesson is that when it comes to the stock market, five years is still a relatively short timeframe where returns can be materially impacted by a single unpredictable event (in this case, the pandemic).
If we really want to understand the FTSE 250’s past, and therefore its possible future, we need to look back far enough so that no single event has a material impact on returns, and that means looking back multiple decades, not just multiple years.
Unfortunately, that sort of long-term data is hard to come by, but SharePad does include FTSE 250 data going back 20 years, which is just about long enough.
From this multi-decade perspective, the FTSE 250’s long-term upward price trend is clearly visible and the last five dismal years can be seen as nothing more than an entirely normal short-term blip within a longer-term upward trend.