At this time of year, we tend to see plenty of stock market forecasts for the year ahead. Already, I’ve seen many FTSE 100 predictions, including a few that have the index finishing 2023 above the elusive 8,000 point level.
Personally, I’m not a fan of trying to predict the exact level of stock market indexes in the future. That’s because forecasting index levels is notoriously difficult.
That said, I do have a number of more general predictions for the FTSE 100 for 2023. I’ll share them with you below.
Volatility in the first half of 2023
My first is that the Footsie will experience some volatility in the first half of the year.
Right now, I see a lot of factors that have the potential to cause some short-term turbulence including:
- Inflation data – higher-than-expected inflation could spook markets
- Interest rates – aggressive interest rate hikes from central banks could upset investors
- Weaker corporate earnings – profits could be vulnerable to inflation and/or lower consumer spending
- General economic weakness – more recession talk could cause stock market turbulence
- Weakness in the US stock market – some market strategists are calling for the S&P 500 index to drop to 3,000 in H1 2023. If it did, it would most likely have a negative impact on the FTSE 100
- China weakness – the Chinese economy is really struggling right now
Given all this, I’ll be starting 2023 with a decent amount of cash within my investment accounts. I want to be ready to take advantage of attractive buying opportunities in the FTSE 100 if they arise.
Dividend divergence
My second prediction is that dividend growth from FTSE 100 companies will be mixed.
I do think plenty of Footsie companies will raise their payouts next year. I expect to see solid hikes from the oil giants Shell and BP (which are swimming in cash right now), as well as from high-quality companies like Diageo and Sage.
At the same time, however, I expect to see a few cuts. I think Vodafone is one company vulnerable to a cut. It has low dividend coverage ratio and a massive pile of debt.
Investment manager abrdn is another company that I see at risk of a cut due to the fact that capital generation has been less than dividend payments recently.
So, I’m going to be selective when picking dividend stocks for my portfolio next year.
A stock picker’s market
My final prediction for 2023 is that gains from the FTSE 100 as a whole will be rather muted.
I think total returns of 5%-8% are achievable, but I’m not expecting much more than that, given the amount of economic uncertainty we face today.
In my view, dividends are likely to make up a significant proportion of returns (the index currently has a yield of about 3.8%).
Having said that, I think there will be plenty of Footsie stocks that deliver attractive, double-digit returns in 2023. In my view, there will be plenty of lucrative opportunities for those who are willing to do the research.
So, I’ll be focusing my attention on individual stocks in 2023 instead of investing in the index as a whole through a FTSE 100 tracker fund.
