In H1, the FTSE 100 hit 7,672 points. This is the year-to-date high for the index. Yesterday, it managed to pop above 7,500 points to post fresh two-month highs. I think that the market has legs to move higher from here, to target the 2022 highs again before the end of the year. Here’s why.
1. Lower inflation
In the latest Bank of England forecast last week, we were told inflation is expected to peak in October. Generally, high inflation is negative for the stock market, due to the cost pressures it puts on companies. If inflation does indeed fall in November and December, it could support a late rally in stocks as investor optimism improves for 2023.
2. Easing China tensions
Over the past week, the escalation in tensions between Taiwan and China have kept a lid on stock market gains. The political and economic ramifications of the West being brought in could be significant. If this is handled in the right manner and tensions ease in coming months, it should help stocks towards a relief rally.
3. An end to the conflict in Ukraine
Another relief rally could be noted if we get a peaceful resolution to the situation in Ukraine. This would not only help to lift stocks from a sentiment point of view, but would also improve company financials due to the easing of supply chain restrictions in the area.
4. Commodity stocks leading the way
The FTSE 100 is a market-capitalisation-weighted index. This means the largest companies have the biggest impact. Some of the largest firms are in the commodity space, notably miners. If the oil price and other precious metal prices are strong in H2, the index as a whole should be supported.
5. Banking stocks up on higher rates
Major banks are also among the largest firms in the market. Higher interest rates ultimately make the banks more profitable. So the correlation to rising rates should enable banking stocks to help the FTSE 100 to push higher.
6. Economic data surprises
There’s uncertainty in the broader market at the moment with concerns around a looming recession. GDP and employment figures will be closely watched. If we get some positive surprises on data releases, concerns around a recession should ease. This in turn should make people more confident to invest.
7. Benefits from a weaker British Pound
The majority of companies in the FTSE 100 are net exporters. This means they need to repatriate foreign currency back to British pounds (GBP). GBP against the US dollar has fallen over 10% so far this year, making the pound cheaper. If this continues, I’d expect trading updates to highlight the financial benefit incurred (such as higher profits) from such a favourable move.
8. Political certainty helping the FTSE 100
The past few months have been characterised by scandals and headaches in British politics. Yet with a new Prime Minister due the first week of September, the rest of the year could spell more certainty. If this is combined with economic actions such as tax cuts, then both consumers and corporates could benefit.
