Last month, the FTSE 100 hit a new record high above 8,400 points. Even though we’ve had a slight pullback since then, the market is still comfortably above 8,000 points. Over the past year, the gains in the index have been driven by some key sectors. Here’s why I feel I need to get exposure to those FTSE 100 shares.
Banking on future profits
One of the sectors that has driven gains is banking. Over the past year, Barclays shares are up 33%. Both Lloyds Banking Group and NatWest Group are up over 20%.
These stocks have helped to push the index higher, and I don’t think the party’s over yet. This is because interest rate cuts should help to stimulate economic growth. Given that cuts are coming at some point this year, it should boost consumer confidence. Lower rates will feed through to lower mortgage prices, likely causing more people to decide to buy a property.
The banks should gain from this, with higher transactional spending and more mortgage product sales. This should filter down to higher profits, pushing the stocks higher.
As a risk, lower interest rates will decrease the net interest income that the banks benefit from. This is true, but I feel that this should be offset by the benefits mentioned above.
I already own some banking shares and won’t be looking to sell any time soon.
A brighter view
Another area that has helped overall is property. Homebuilder Taylor Wimpey (LSE:TW) is up 35% over the past year. Berkeley Group is up 28% as well.
This is one area that I don’t currently have much exposure to and so am seriously thinking about buying some Taylor Wimpey shares. This is because I think the property sector will continue to recover over the next year.
Part of this relates to the aforementioned interest rate cuts. Cuts should make mortgage rates fall, making it more affordable for people to buy property.
Further, even though the order book right now is lower than it was a year ago, it continues to recover. At £2.09bn (7,686 homes), it’s that demand from customers is strong. It also provides me with some confidence that future revenue is already somewhat in the bag.
With a dividend yield of 6.44%, I can pick up generous income while owning the stock.
As a risk, consumer sentiment right now is still very fragile. It wouldn’t take much, such as inflation rising over the summer, to cause investors to get cold feet about Taylor Wimpey and the recovery.
Building for the future
Based on the top performers in the FTSE 100 including several stocks from banking and property, I feel I need to have exposure to these areas. I believe that all investors should have a diversified portfolio that includes these sectors.
