3 reasons why I expect the FTSE 100 to bounce back strongly
While the FTSE 100 may have broken out of its recent correction, the recovery has been tentative at best.
It’s no surprise to find that stock market investors remain nervy, and their reluctance to push the boat out can be excused. Fears over tightening monetary policy in the US and President Trump’s escalating trade wars are unlikely to go away, but there are several reasons why I still expect the Footsie to climb back up. And fast.
Sterling set to dive again?
The FTSE 100’s October dive corresponded with an uptick in the value of the pound. For the uninitiated: a strong pound adversely affects the profitability of those companies that report in foreign currencies.
But in the short term and beyond, the outlook for sterling can be considered patchy at best. With the chances of a catastrophic, no-deal EU withdrawal increasing ahead of March’s planned departure date, the pound could continue to crumble. The British currency is also likely to struggle after this period as the economic reality of life outside the European bloc hits home.
The safety of foreign markets
With the consequences of the Brexit saga likely to last from weeks to (many) years into the future, share shoppers are more likely to pile into the relative safety of businesses with considerable exposure to overseas markets.
And of course, the FTSE 100 is choc full of companies with considerable foreign footprints. Plumbing and heating specialist Ferguson extracts just 5% of trading profit from the UK, for example, while household goods giant Reckitt Benckiser takes a similar percentage of revenues from these shores.
Sectors with a huge global bias like pharmaceutical manufacturers, mining specialists and oil drillers, are well represented in Britain’s elite index, giving further reason to expect the bourse to sprint higher once more.
There are bargains to be had
The recent stock market washout has left plenty of opportunity for dip buyers to nip in as well, and I expect interest from these investors to pick up now that trading conditions have become a lot less volatile.
There’s no shortage of conventionally expensive stocks — or specifically, those trading on forward earnings multiples above the accepted value terrain of 15 times or below — that are now trading below their historical norms.
I myself bought into Diageo in recent days after its prospective P/E ratio fell to a shade above 20 times, a figure I considered to be a snip given its exceptional multinational exposure and market-leading product suite. And there are others I have my eye on at the present time.
For those seeking conventional value, the FTSE 100’s recent correction has left plenty to go at. Indeed, well over half of the index’s constituents trade below that figure of 15 times (with many trading even lower, underneath the bargain benchmark of 10 times), and while there are plenty of firms whose low ratings reflect their poor profits outlooks, many are simply unjustifiably being ignored by the market.
In my opinion now’s a great time for blue-chip investors to go shopping.
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Royston Wild owns shares in Diageo. The Motley Fool UK has recommended Diageo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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