There's no denying it: uncertainty has dominated investing in 2024. But the FTSE 100 has remained surprisingly resilient—and even surpassed expectations.
In May, the UK blue-chip index hit a record high of 8,445.80 points, and there is now every chance of a second record high before the much-observed "Santa" rally (where Christmas cheers buoys investor sentiment at year-end) kicks off in December.
A number of factors have driven the FTSE 100's success: changing perceptions about the UK's investability; election positivity outweighing result uncertainty; and, crucially, the buzz created by the return of mergers and acquisitions (M&A) to the marketplace. Falling inflation, an initial rate cut in August, and the perception of UK stocks as a safe haven amid two technology corrections in the US, have also helped.
All that has ended a near-decade of persistent underperformance.
Will The FTSE 100 Hit Another Record High?
Today the FTSE 100, which currently sits at 8,282.56, is only a few percentage points away from its May record. Another high could happen.
"Inflation and interest rates have decreased since then, and there's more interest rate cuts on the cards. GDP has picked up as well since the beginning of the year," says Morningstar European market strategist Michael Field.
"I am not trying to paint a rosy picture that the UK is in amazing shape, but if you look at those three things together, it's in better shape than it was in May. We could see record highs again."
Other outlooks concur. Goldman Sachs analysts now expect the FTSE 100 to rise to 8,800 over the next 12 months. The FTSE 100 began 2024 at 7,721. It has seen a rise of almost 7% since then.
The German bank adds that low valuations and dividend yields are strong longer-term contributors to the attractiveness of the UK, although its analysts also argue the UK itself is being held back by a "dearth of home-grown equity investing." Need it be pointed out once more: London has no "Magnificent Seven" in the form of Nvidia NVDA, Tesla TSLA, Meta Platforms META, Apple AAPL, Amazon.com AMZN, Microsoft MSFT, and Alphabet GOOGL.
Nevertheless, some fund managers are confident. Andrew Raikes, portfolio manager of the Morningstar Gold-Rated TT UK Equity Income fund, also expects the FTSE 100 to make new highs by the end of the year. Year to date, his fund has returned 9.67% to investors, beating its UK Large-Cap Equity category by over 1%.
"There is no doubt there is substantial value across UK equities, including the FTSE 100, and we fully expect UK indices to be making new highs in time. Whether this happens before December, time will tell," he says.
"Global equities have had a good run and there are some potential risks to contend with in the near term, including the Budget here in the UK at the end of October, and the US Election in November, which may not be directly relevant to the fundamentals of much of the UK market, but which could be a source of volatility for global equities generally."
Which Companies Will Drive The FTSE 100 in Q4?
Volatility accounted for, it could be the consumer discretionary sector that pushes the FTSE 100 to that fresh high.
"The whole sector is [sufficiently undervalued] due to people steering clear because they feel that consumers do not have much money in their wallets," Field says.
"But the positives are that interest rates, mortgage costs and living costs have come down, and inflation has straightened out a little bit.
"For people who did not have much money up to now, it should be getting easier in the coming months and into next year, which means that the valuations of those stocks should slowly start to go up as and when they see sales rebounds."
Here, it's worth looking at Reckitt Benckiser RKT and Unilever ULVR in particular. Both are FTSE 100 companies. Both have endured some pain this year. According to Morningstar data, year to date, Reckitt is down -15.60%, while Unilever is up 32.42%, respectively. Both have also announced restructures. Reckitt will dispose of its homecare and infant formula brands, while Unilever will sell its entire ice cream division.
Reckitt is currently trading at £45.34, beneath its Morningstar Fair Value Estimate of £65, while Unilever shares trade at £48.33, above its Morningstar Fair Value Estimate of £43.80.
Field also backs housebuilders Taylor Whimpey TW. and Persimmon PSN, arguing the low valuations witnessed by each company will now be met with significent upside as interest rates decrease and the Labour government attempts to improve housing affordability.
Michael Browne, chief investment officer at Martin Currie, agrees. He believes Labour's Oct. 30 Budget could have a substantial impact on the FTSE 100.
"By December, the UK will also have taken a good look at the new Labour economic policy," he says.
"To deliver its housebuilding program, [Labour] needs housebuilders to build, and for that it needs demand driven by lower rates.
"Produce a balanced Budget, which gets the approval of the Office for Budget Responsibility, and there is a real chance that there will be a jumbo 50bps cut in November."
As such, Browne is buying FTSE 100 stocks that could benefit from Labour's priorities.
"Taylor Wimpey for housebuilding; National Grid [NG.] for the drive to electrification that could see up to £120 billion invested in renewables and the grid in the next five years. Banks like falling rates, as they can make more loans with fewer losses, [so for that] NatWest [NWG] would be our pick," he continues.
"No one knows what the consumer likes better than Next [NXT], so lock in for the prospect of wage and employment growth, and don't forget unloved Sage [SGE] as the USA and UK enter recovery."
But it's not all positive. Browne also reckons Labour's Budget will hurt savers in the short term, which could lead to a setback in the markets in November.
"That Budget could hurt savers, as the government has ruled out changes in income tax and corporation tax," he says.
"There is a real risk that savers could have their pockets picked [in other ways]: changes in ISA allowances, capital gains tax, inheritance tax and business allowances would not encourage investors."
For his part, Richard Marwood, head of income at Royal London Asset Management and lead manager of the Morningstar Gold-Rated Royal London UK Equity Income fund, says the market still has a lot to get through before the end of the year. For the FTSE 100 to thrive, he feels "some of the big sectors—banks, oils, mining and pharmaceuticals"—must also rise in the remaining months of the year.
Is that likely? After all, the FTSE 100 could still be hindered by dips from names with the largest market capitalizations in the index itself. Pharmaceutical giant AstraZeneca AZN, which makes up 9.29% of the index, has returned 27.95% from Jan. 1 to Aug. 31 2024, for instance.
Key Morningstar Metrics For AstraZeneca
• Economic Moat: Wide
• Fair Value Estimate: £124.00
• Forward Dividend Yield: 2.02%
• Morningstar Rating: 3 stars
• Sector: Healthcare
• Morningstar Uncertainty Rating: Medium
Oil giant Shell SHEL also represents 9.19% of the index. It has returned 7.39% over that same time period. Last month, AstraZeneca became the only UK-listed company to achieve a £200 billion valuation, although a new drug it was producing to improve the lives of breast cancer patients recently failed in trials. Shell is also in the midst of a cost cutting drive, culling a fifth of its workforce in two oil and gas exploration divisions.
Both companies need a good final quarter to drive the FTSE 100 higher.
For Nicolò Bragazza, associate portfolio manager at Morningstar Wealth, it is important for investors to remember that the domestic issues facing the UK economy will not make or break the FTSE 100 in the final three months of the year. Remember, he says, the FTSE 100 is a global index.
"One of the things that catches the attention of many people is that there are lots of conversations around the impact of Brexit and certain UK developments," he says.
"But the FTSE 100 is a collection of global companies that generate most of their revenue abroad. What happens in the UK is important but not as important as you may think for the fundamentals of these businesses over the long term."
