The FTSE 100 index is home to British corporate giants, many of them in business for several decades. This large-cap index mainly comprises financial, consumer discretionary and industrial sectors. In fact, these three groups form 60% of the index. Right now I’d say this is an advantage for it. Let me explain.
Time for the FTSE 100 to shine?
For many years, the FTSE 100 lagged while technology boomed. As the technology-filled Nasdaq achieved an annualised return of 21% over the past five years, the Footsie only managed 5% per year. But after several strong years, US technology shares started 2022 on a weaker note. This is mainly down to a change of stance from the US federal reserve. To put it simply, the high-growth technology sector benefits from low interest rates. Companies are valued by discounting future cash flows and high-growth companies are more sensitive to changing interest rates. After many years of low and falling interest rates, the world’s largest central bank indicated it will now start to raise rates to battle inflationary pressures. With technology shares possibly showing no signs of improvement any time soon, could it be time for the FTSE 100 to shine? I’d say so.
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It’s already one of the best-performing major indices in the world so far this year. Although nothing is guaranteed, I reckon this could bode well for the coming year.
How to invest £10,000 now?
So how would I invest £10,000 right now? I could buy a FTSE 100 exchange traded fund (ETF). This financial instrument tracks and imitates the performance of these 100 shares. Alternatively, I could pick a few carefully selected shares instead. I reckon some stocks could perform better than others in the current market environment.
For instance, I really like mining giant Rio Tinto (LSE: RIO) right now. It provides some protection against rising inflation due to its exposure to commodities. Iron ore prices have been rising over the past few months, and I reckon momentum could push prices higher. Commodity prices could also be helped by economic support measures from The People’s Bank of China, the country’s central bank. Commodity prices can be volatile and uncertainties remain, but I reckon Rio Tinto is an established and well-managed company. It should help to provide some diversification against falling technology shares.
A portfolio staple
Next, I’d pick a consumer staples stock. My top pick is drinks giant Diageo (LSE: DGE). It owns several hundred famous drinks brands, many of which have been around for decades, if not centuries, like Guinness. Diageo’s consumer brands can be sticky, so when prices rise it’s able to pass on these higher costs to customers. This protects its profit margins. Diageo benefits from metrics that make it a high-quality stock, in my opinion. It offers a profit margin of nearly 30%, a return on capital employed of 15% and a dividend yield over 2%. All of this while it still manages to grow sales and earnings. It needs to protect against imitators and competitors, but so far it has managed to do so effectively.
I reckon I could split the £10,000 investment by allocating £5,000 to the FTSE 100 ETF, £2,500 to Rio Tinto and £2,500 to Diageo. That way, I could diversify and allocate some funds to my top picks too. Of course, I’d make these investments in my Stocks and Shares ISA to benefit from its tax advantages.