London’s premier stock index, the FTSE 100, saw only a modest 3% gain last year and has yet to surpass its 2018 levels. However, according to Russ Mould, AJ Bell’s investment director, there are reasons to be optimistic about a potential turnaround.
Factors such as dividends, share buybacks, and takeovers have bolstered the FTSE’s performance, delivering a total return of nearly 10%, surpassing inflation, gilt yields, and traditional cash returns.
While this falls short of the 41% growth seen in the Nasdaq, the 25% in the Nikkei, and the 20% in Germany, Mould believes these factors underscore the resilience of the UK’s leading stock market.
Analysts are forecasting a robust 52% increase in the FTSE 100’s aggregate pre-tax income in 2024 compared to 2018, with post-tax earnings expected to rise by 36%.
Corporate confidence is evident in a record £54.7 billion in share buybacks in 2023, alongside an anticipated £78.7 billion in dividend payments, resulting in a 6.7% cash yield for the year.
Despite prevailing pessimism towards UK equities, Mould points out that market sentiment can change, and the current mood is overshadowed by low prices, presenting an opportunity for value-oriented investors.
A modest 8% advance to 8,350 in the FTSE 100 could result in a price/earnings ratio of 12 and a yield of 3.9%, both of which are considered reasonable.
While uncertainties like geopolitical tensions and inflation concerns persist, the market anticipates potential interest rate cuts, which could justify a reevaluation.
The UK stock market’s apparent undervaluation is attributed to its heavy exposure to volatile sectors such as energy, mining, banking, and insurance, which might deter environmentally and socially conscious investors.
However, the attractive valuation, especially in sectors like banking, mining, and construction, already factors in expected downturns and recessionary scenarios.
Notably, the two-year gilt yield, which often foreshadows Bank of England actions, stands at 4.30%, reflecting expectations of interest rate cuts.
The possibility of a recession may not be as surprising to the market as some expect, and alternative scenarios like stagflation or unexpected interest rate trends could highlight the UK equity market’s resilience.
The FTSE 100’s reliance on sectors like energy, mining, and banking positions it favourably in the event of inflation or stagflation, setting it apart from markets like the USA, dominated by high-valuation tech and biotech stocks.
In the face of rising inflation or stagflation, tangible assets may become more attractive compared to paper assets.
In summary, the FTSE 100’s potential for improved earnings estimates and its suitability for inflationary scenarios make it an intriguing prospect for 2024.
