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Having hit a record high in 2018, the UK’s main index spent the next five years underperforming. That was until last week, when it hit a series of intraday highs. In the future, the prospects for the FTSE 100 it is largely positive. However, I think that maintaining such levels can be challenging.
Britain’s flagship index has started 2023 strong. Despite a looming recession in the UK, it has gained almost 400 points since the start of the year and has even outperformed the dow jones. It’s no surprise to see it hit all-time highs last week. But why did he do it?
Well, most of the FTSE 100 companies make their profits outside of the UK. In fact, a substantial portion of revenue comes from emerging markets and the US. As such, a slowdown in UK economic activity is not too detrimental to company earnings. What’s more, several undervalued stocks have piqued the interest of value investors like me.
Although the Footsie has been criticized over the years for its lack of growth and technology stocks, the index’s weighting for blue-chip names has been favorable over the past year. That’s because most of his constituents have benefited from higher oil and commodity prices, rising interest rates and the reopening of China. As a result, the index is up 15% from its low point in October.
Sector | % of FTSE 100 |
---|---|
Consumer Staples | 17.9% |
finance | 17.8% |
Materials | 13.4% |
industrial stocks | 12.2% |
Health care | 11.7% |
Energy | 9.5% |
discretionary consumption | 6.9% |
communications | 4.3% |
Real estate | 1.4% |
Technology | 1.4% |
Running out of steam?
I think the FTSE 100 is likely to continue its upward trajectory towards the 8,000 mark. However, its momentum beyond that could be limited, according to several analysts. This is because a substantial number of stocks have skyrocketed in value over the last month and a half. As such, some of them are no longer bargains as their valuation multiples are now more expensive.
A slowdown in China, global inflation back to 2% and a successful peace deal for Ukraine could see the FTSE 100 lose its crown in 2023.
James Penny, TAM’s Director of Asset Management Information
Liberium analyst Joachim Klement expects the FTSE 100 to decline. He anticipates oil prices to fall in the coming months as the US and UK enter recession. Opponents will point out that China’s reopening could offset this, but growth has been slow so far. Also, financial stocks may peak soon as the Bank of England looks to halt rate hikes or even cut interest rates. This would put an end to the generous amounts of interest income that the banks have been receiving.
Predicting is a fool’s game
That said, it’s worth noting that trying to predict the stock market is a waste of time, as anything can happen in the next 12 months.
We have no idea what the stock market is going to do when it opens on Monday. We haven’t been good at the moment. We have been reasonably good at determining when we were getting enough for our money.
Warren Buffett and Charlie Munger
So even if the FTSE 100 doesn’t hold a high of 8,000 for an extended period of time, I still plan to buy UK stocks at a reasonable price. After all, there are many trading at cheap multiples, with solid financials and great growth prospects. As a result, I have identified a number of strong companies that I am buying for long-term growth and strong dividends.
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