FTSE 100 shares have taken a small tumble in recent weeks following Fitch’s downgrade of the US credit rating. Seeing a UK index being affected by international issues isn’t entirely surprising. After all, stock markets worldwide are interconnected to some degree.
However, in the long term this event, while potentially concerning, doesn’t have any serious repercussions for UK businesses. As such, the Economic Forecast Agency has maintained its predictions that the FTSE 100 could reach beyond 8,000 points by July next year.
Obviously, such forecasts need to be taken with a pinch of salt. After all, this is the agency’s “best-case scenario”. And should economic conditions suffer in Britain, the FTSE 100 may fall to around 7,100 points instead. Nevertheless, investors are still currently presented with many buying opportunities for discounted stocks. And as confidence steadily returns to the market, a hefty amount of wealth could be generated.
Finding the best shares
Inflation has created enormous problems for both businesses and consumers lately. But with the devaluation of the British Pound steadily slowing, it seems the Bank of England’s strategy is doing the trick. However, as we’ve already seen, UK inflation has a knack for being stubborn. And the economy might be plagued with it for quite some time.
Therefore, when searching for investment-worthy FTSE 100 shares, focusing on the firms that have proven their resilience is prudent. Businesses that can pass on higher input costs to customers without compromising sales volumes are the most likely to protect their margins. At least, that’s what I think.
This sort of pricing power is usually found in two places. The most common is a strong brand with cult-like followings. However, a more powerful advantage is when a corporation has embedded itself so heavily in a customer’s operation that a divorce is utterly unfeasible.
What to look out for
The pricing power of even the most famous products or services has its limits. And while inflationary costs may be passed on, other rising expenses may prove more difficult. One of the most common of these would be interest on debt.
Borrowing money can help a FTSE 100 company spark tremendous growth in the long run, ultimately boosting the value of its shares. However, if loans are misused, it can quickly create problems instead. With interest rates being so low for over a decade, borrowing discipline from management teams has seemingly dropped. And the groups that overborrowed, assuming that interest rates would stay near zero forever, are now starting to pay the price.
Balance sheets riddled with floating-rate bonds, bank loans, and other credit facilities are generating higher and higher interest expenses. This, in turn, places pressure on net profit margins. And if a group can’t keep up with its loan obligations, even the most profitable firm on a gross basis may find itself in a heap of trouble.
Therefore, I’d personally focus on relatively debt-light stocks with equity making up the bulk of a group’s capital structure.
It’s impossible to predict precisely when the FTSE 100 will surpass the 8,000-point threshold. However, given the UK is home to world-leading enterprises, I remain confident that this target will eventually be hit in the long run. And by capitalising on the healthy firms trading at a discount today, investors could set their portfolios on the path to success.
