The FTSE 100 closed above 7,900 on Friday afternoon — a record high. This might seem unusual to some, as during the week, the UK was forecast to be the only G7 economy to experience a recession in 2023.
However, there were several reasons for last week’s surge that extended gains over the past month. For one, investors gained confidence that central banks will slow down recent interest rate increases. Meanwhile, the pound fell against the dollar.
Accurate forecasts
Research from the Economic Forecast Agency (EFA) had suggested that the FTSE 100 would end January around 7,900. And they weren’t far off.
But the current forecast, also from the EFA, suggests that the index could reach 8,400 by the end of February and 8,500 by the end of March.
In fact, some of the EFA’s estimates suggest that the index could reach 8,912 at the end of April and 9,623 by the end of July.
These are the top end of the estimates, but even the average monthly closing figures are very positive.
My take
These are clearly quite optimistic views, but it’s worth remembering that the FTSE 100 isn’t a reflection of the UK economy. In fact, around 70% of index revenues comes from outside the UK. This means that these FTSE-listed companies have considerable exposure to faster-growing markets.
Moreover, nearly a quarter of firms on the index can be described as resource or energy stocks. And this is a booming sector right now, and one that’s showing few signs of slowing down. Resource-importing economies such as China and India are expected to grow at 5.2% and 6.1%, respectively, this year.
In this respect, we could see more of the same going forward. Resource and energy stocks could continue soaring, while companies in other sectors, including banking, retail and homebuilding trade at discounts in the near term.
There are certainly signs that interest rates will start to fall towards the end of the year — the Bank of England has indicated that it may have done enough. This would be positive for a host of sectors, perhaps most obviously housebuilders.
What should I do?
As an investor, I’m always trying to anticipate what will happen in six-to-12 months time. As such, I’m increasingly looking at sectors that have underperformed in in the current environment.
It may still be too early to consider buying more housebuilder stocks, but as inflation and interest rates come down towards the end of the year, the sector will become a lot more appealing.
UK-focused banks such as Lloyds and Barclays are another area of interest. 2023 looks like a year of negative growth for the UK, but the end of the year and 2024 looks more promising. Forecasts suggest we’re likely to see interest rates between 2% and 3% while the economy returns to growth. In such an environment, net interest margins will remain elevated while impairment costs should fall.
