As a fresh year approaches, I like to try and predict what the big stock market stories might be looking ahead. Here are my thoughts on what the FTSE 250 share index might do over the next 12 months.
A move above 22,000 points?
2024 has so far been a positive one for the FTSE 250. Up 4% in the year to date, this is roughly the same rate of growth it enjoyed last year.
If this rate continues, the index will rise from 20,400 points today through the 21,000-point barrier. To be exact, it’ll end the year around 21,216 points.
I think the index may perform more strongly than the last couple of years, however. I’m tipping it to move above 22,000 points.
Base rate boost
There are two reasons why. First, I think there’s a chance the Bank of England (BoE) may slash interest rates more sharply than the market is pricing in.
Yesterday (18 December), three of the central bank’s nine-member rate-setting committee voted to cut interest rates. This was higher than expected, and while the base rate remained at 4.5%, the balance could tip towards more aggressive action if Britain’s economy remains weak.
UK interest rates are important to the FTSE 250, as more than 40% of the index’s earnings come from these shores.
The BoE is walking a delicate tightrope given inflation uncertainty. But with rising unemployment and slowing recruitment cooling wage growth, there could be more wiggle room for rate-setters to play with in 2025.
Goldman Sachs expects the base rate to move next year to 3.25%. That’s far lower than the 4% the broader market expects. If this happens, London’s share prices could fly.
Bargain-hunting to continue
I also think the FTSE 250 will rise, as UK shares continue to look cheap from a historical perspective.
Since December 2019, the index has fallen by around 1,270 points, or 5.8%. To put that into perspective, the FTSE 100‘s risen 6.9% and the S&P 500‘s exploded 83.1% over the same timeframe.
As a consequence, the index looks mighty cheap right now. Its forward price-to-earnings (P/E) ratio is well below the long-term average of 14 to 15 times, at 10.7 times.
This could continue to attract bargain hunters at home and abroad.
Here’s what I’m doing
While I’m quietly confident the FTSE 250 will rise in 2025, I’m not piling into something like an index tracker fund. This is because there are individual shares I’d rather buy to target a better return next year.
Babcock International (LSE:BAB) is a defence stock on my radar for next year. It’s risen 19% in value so far in 2024. And I’m optimistic it can continue soaring as Western arms spending accelerates.
Latest financials last month showed the excellent progress Babcock’s making in this unhappy global climate. Organic revenues rose 11% between April and September, driven by strength across its land and nuclear divisions. Underlying operating profit leapt 10%.
Despite 2024’s strong gains, Babcock shares still look cheap, trading on a low forward P/E ratio of 11.4 times. This leaves scope for further price gains next year, even though supply chain issues remain a threat to profits.
This post was originally published on Motley Fool
