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I was right to buy FTSE 250 stocks in 2021. Here’s what I’d do now

Business development to success and FTSE 100 250 350 growth concept.

Early this year, I said that I would focus on buying FTSE 250 stocks in 2021. This was because even in February, it was clear to me that the index was due to make more gains. With vaccines developed, the beginning of the end of the pandemic seemed to be in sight. And that would mean economic recovery. 

Not quite forgotten in the pandemic troubles was the fact that the UK had also signed the Brexit agreement. This meant that its stock markets could — in theory — now start rising after years of being in limbo. The FTSE 250 index was particularly poised for gains, since it has a higher concentration of stocks focused on the UK market as opposed to the FTSE 100, which houses more globally-focused businesses. 

Where will the FTSE 250 index go in 2022?

The pandemic is still with us, of course, but the index has continued to show a healthy increase over the year. As of yesterday’s close it was up almost 12% from a year ago. I am glad I bought into the FTSE 250 rally in 2021. But the question for me now is this: where will the index go in 2022? There are two reasons I ask this. I added to my FTSE 250 stock holdings this year, and it would be good to know how far they might rise next year. Also, I want to decide whether I should focus even more on FTSE 250 stocks considering their recent performance. 

I think there is a good chance that the index could continue to make gains in 2022. The recovery should continue now that there seem to be even lower chances of restrictions than we saw in 2021. However, I think that the speed of the recovery could remain underwhelming, which could influence stock market activity. This is because there are a number of risks on the horizon as well. 

Risks to the index

Inflation in the UK, for instance, just touched 5% on a year-on-year basis. And it is expected to stay elevated in 2022 as well. This is not good news for companies’ financial health. Their earnings could be squeezed as costs rise and consumer spending need to be allocated with greater care across products and services, potentially slowing down revenue growth as well. If FTSE 250 companies’ performance suffers, it could reflect in their dividends, outlooks and stock prices as well. 

Also, as I mentioned, the pandemic is not over yet. The UK has just reported a record rise in coronavirus cases. Despite what I said earlier about the chances of restrictions diminishing, higher case numbers can still increase the risk, in my view, of our going back into a lockdown or semi-lockdown. It had seemed quite likely that England would see some more restrictions in the festive period. Even though that did not happen, I think it is possible that some new rules might be brought in. That could dampen the market mood. 

How I’d invest in 2022

However, 2020 has taught me that there are always investment opportunities around, irrespective of what is going on with the broader markets. I like this stock, for instance, which is dirt-cheap, despite the rise in the FTSE 250 index this year. I would focus on such investments. 

The post I was right to buy FTSE 250 stocks in 2021. Here’s what I’d do now appeared first on The Motley Fool UK.

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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.