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Anyone who follows the stock market and market commentary will know that many major banks and institutions currently favor FTSE 100 highlighting attractive equity valuations compared to the US and a stronger macroeconomic environment than Europe.
However, the UK index still suffers from poor sentiment, a lack of momentum and a lack of tangible growth catalysts. So, let's take a look at the mistakes to avoid when investing in the index.
Avoid negative impulse
Some of the best quantitative models for investing place considerable emphasis on stock price momentum. If a stock is rising and the valuation and growth metrics are favorable, it is likely to continue rising.
A closer look at the FTSE 100 reveals that many stocks are simply stagnating or falling despite favorable valuations. As such, investors should be careful that their investments could stagnate or lose money even if the headline metrics look attractive.
Companies like Phoenix Group, Legal and generaland Diageo (all of which have been part of my portfolio for the last decade) have simply underperformed despite their attractive valuations.
Also, I've learned not to try to catch falling knives. And from time to time I need to be reminded of that. Earlier this year I made a very small investment in Burberry – It ended badly.
<h2 class="wp-block-heading" id="h-stocks-need-catalysts”>stocks need catalysts
In this type of market, stocks need catalysts. Catalysts can come from anywhere. It could be back-to-back gains or it could be a planned election or tax cuts. As it happens, I don't see a huge number of catalysts for the FTSE 100 as a whole, but more focused research may reveal stronger investment theses.
While artificial intelligence (ai) has not had a major impact on the index (especially compared to the US), some stocks such as wise group They are reaping the benefits. Congratulations to my colleague Edward Sheldon for picking the stock before its recent rally.
Conversely, a lack of catalysts may simply mean that a stock will remain stagnant for the foreseeable future.
Concentration risk
Around 70% of FTSE 100 companies' sales originate outside the UK. But that doesn't mean the index won't crash if economic or political developments in the UK start to look unfavorable. This brings me to the risk of concentration. It is important to distribute investments between different sectors and different geographies. While the US stock market may seem expensive, we can still find excellent investment opportunities.
My FTSE 100 pick
My favorite stocks in the index right now are Scottish Mortgage Investment Trust (LSE:SMT) and International Group of Consolidated Airlines. Both enjoy strong momentum backed by attractive valuation multiples.
The former invests heavily in US-listed tech stocks and offers the best exposure to ai and new technologies on the FTSE 100. This is because the trust invests in companies such as NVIDIA, teslaand even unlisted pioneers like SpaceX.
What's more, it's currently trading at a 10% discount to its net asset value, suggesting I'm buying exposure to Nvidia at a 10% discount.
However, this tech space can be volatile, especially when we see Tesla trading at 100 times forward earnings. Additionally, investors may also be cautious about private sector valuations, which account for around 25% of the fund.
However, I can't get that exposure elsewhere in the index. And stock pickers have a great track record. I think it's worth considering.
