The FTSE 100 has had a good run recently. On Friday, the index peaked at 7,244 points. That represents its highest level since February 2020 – before the coronavirus pandemic.
Can the FTSE 100 keep rising from here? I think it’s certainly possible, now that the world’s reopening and economic activity’s picking up. That said, there are a number of risks that could derail the recovery and send the index lower again. Here are three I’m watching.
Inflation
The first risk I’m keeping a close eye on right now is inflation (higher prices). All over the world, inflation’s running rampant, and the higher prices are hitting companies’ profits.
We’ve seen this recently with a number of FTSE 100 companies. Take Unilever, for example. Its H1 2021 operating margin was down 1% year-on-year, partly due to input cost inflation. “We have seen further cost inflation emerge through the second quarter,” it said.
On the back of inflation concerns, analysts at JP Morgan recently downgraded Unilever to an ‘underweight’ rating from ‘neutral’, saying it remains at risk of dampening market expectations in H2.
If inflation persists, it could cause weakness across the FTSE 100. It’s worth noting, however, that some companies are more exposed to this risk than others. Packaging companies like DS Smith, for example, are more exposed to inflationary pressures than software companies like Sage.
Sky-high oil prices
Closely linked to the inflation risk is the threat of higher oil prices (oil is a key driver of inflation). Recently, prices have spiked to multi-year highs on the back of major global supply and demand imbalances. Some experts believe prices could go much higher. Analysts at JP Morgan, for example, recently said that oil could potentially hit $130-$150, due to supply problems.
If oil prices were to rise to these levels, I imagine we’d see the FTSE 100 come down a peg. That’s because higher oil prices essentially act as a tax on business earnings, reducing profits. They also reduce consumer spending power.
Having said that, there are some companies in the FTSE 100 that would benefit from higher oil prices, namely Royal Dutch Shell and BP. If oil does surge higher, I’d expect these stocks to outperform.
Supply chain challenges
Finally, we have supply chain challenges. These are broad in nature and include:
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Semiconductor shortages
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Brexit disruption (the shortage of lorry drivers in the UK)
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Blocked ports in the US (there’s a huge pile up of cargo ships outside LA)
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Staff shortages due to Covid-19 and government stimulus measures
All of the above are hitting company profits right now. If they persist for a while, (which many analysts believe they will) they could hurt plenty of FTSE 100 shares, including consumer goods stocks and industrial stocks.
I’ll certainly be keeping this risk in mind as I look for stocks for my portfolio in the months ahead.
