When I opened my groggy eyes to early market movements today, I actually had to rub them to check if I was seeing right. All the top risers in early FTSE 100 trading were banks. Mid-way through the trading day, the top performers look slightly different. Even then all banking stocks are up appreciably today.
The biggest FTSE 100 riser is still a banking stock, Standard Chartered. It is up by almost 6% as I write. The second biggest riser is a bank too, HSBC, which is almost up 4.3%. Natwest, Barclays, and Lloyds Bank follow with rises of 2.1%, 2%, and 1.9%, respectively.
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What is going on here?
Interest rate increases due
I reckon this is correlated with more confirmation that interest rates are indeed going to harden in 2022. Yesterday, the US Federal Reserve said that it will start the rate tightening process from March onwards to curb high inflation. This follows the increase in interest rates seen by the Bank of England (BoE) in December 2021, following a steep rise in inflation.
Banking stocks had rallied at that time as well. I reckon they have even more reason to do so now, considering that a number of FTSE 100 banks operate in international markets as well. Even if their biggest market is not the US, like in the case of HSBC, I think the writing is on the wall that other central banks could also start raising interest rates soon too.
UK’s growth forecasts positive for FTSE 100 stocks
This is one of the reasons that I have been bullish on these stocks for 2022 for a while now. But there are others too. For instance, the International Monetary Fund released its updated 2022 forecasts yesterday. As per these, the UK is expected to see a robust 4.7% growth in the year, which bodes well for credit demand. Further, it is expected to be the fastest growing developed economy in Europe after Spain, which could be a positive for FTSE stocks.
Moreover, I expect to see their dividends rise as well. I believe that banking stocks have lagged behind in recovery compared to many other FTSE 100 stocks because they were held back from first paying dividends and then allowed to pay them only in restricted amounts during the pandemic. However, as these regulations have been progressively relaxed, their dividend yields have risen. They are still fairly low, to be sure. Definitely lower than the average FTSE 100 yield of 3.4%. But they could improve over the year, I believe.
What I’d do now
The only catch is that we never know what happens next with Covid-19. The recent experience with Omicron being a case in point. Investors could turn bearish, which in turn could send all stocks tumbling. This would particularly be likely for more economy sensitive ones like banks.
Despite Omicron though, the FTSE 100 made a lot of progress in 2021. And I would invest in 2022 keeping that big picture in mind. Banking stocks look like really good buys to me for this year. So much so, that I am beginning to wonder why I still do not hold any in my own portfolio!