2023 was a spectacular year for many global stock indices. But the last year proved to be another tough one for London’s FTSE 100 index of shares.
Chart by TradingView
During the last 12 months the Footsie rose just less than 4% in value. It trailed key European indices and performed especially poorly compared with the US’s S&P 500 (up 25%).
Analysts Susannah Streeter of Hargreaves Lansdown notes:
Britain’s blue-chip index still appears unloved with attention grabbed by the bright lights of Wall Street and the tech heavy makeup of New York’s exchanges, with a frenzy for all things AI fuelling buying behaviour.
The FTSE 100‘s heavy weighting towards ‘old world’ shares like miners, banks, consumer staples and energy companies has seen it lose out as appetite for tech stocks has heated up. But soaring interest in tech stocks isn’t the only reason for its recent underperformance.
As Streeter also notes: “Even though the Brexit hangover has eased, the UK’s stagnating economy and volatile political scene of recent years appears to be putting off investors.”
New year woes
Unfortunately for the Footsie, these factors should continue to impact investor sentiment during much (if not all) of the new year.
The political landscape’s likely to remain explosive ahead of the upcoming general election (which must be held before 28 January 2025).
Meanwhile, Britain’s economy looks on course for a prolonged period of weak growth (including a potential recession). Analysts at KPMG, for instance, expect GDP to expand at a below-average 0.5% and 1% in 2024 and 2025 respectively.
The UK faces significant structural problems that could dampen economic growth (and market confidence in FTSE 100 stocks) beyond the short-term too. These include:
- Low productivity growth
- Labour shortages and skills gaps
- Post-Brexit trade disruption
- High public debt
But I’d still buy FTSE 100 shares!
Having said all this, another underwhelming year for the broader Footsie is by no means inevitable.
A declining pound could lift the index by boosting profits of companies that report in foreign currencies. Signs of sharp interest rate cuts by the Federal Reserve and the Bank of England could also lift UK blue-chip stocks (as they did during December’s ‘Santa Rally’).
In all honesty, none of us know for certain which way stock markets will move during the new year. But this uncertainty doesn’t really affect my investing strategy.
It’s because I buy shares for the long term, perhaps a decade or more. And a large number of FTSE 100 stocks look set to deliver strong returns over that sort of timescale.
Drinks giant Diageo, life insurers Aviva and Legal & General, and rental equipment provider Ashtead are just a handful of large-cap companies I’ve bought in recent months. Sure, they may experience turbulence in the new year as the global economy struggles. But over the long haul I expect them to deliver brilliant investor returns.
On top of this, many top FTSE businesses currently carry valuations well below historical levels. Today, the index trades on a forward price-to-earnings (P/E) ratio of around 11 times. This is well below its three-year average of approximately 17 times.
All things considered, I think now’s a great time for value investors like me to buy FTSE 100 shares. I certainly plan to continue building my own portfolio in the new year.
