The FTSE 100 has outperformed the majority of global indexes over the past year. Indeed, whereas the S&P 500 has sunk 12% in this period, the Footsie has remained broadly flat.
However, it has not been entirely immune to the current macroeconomic uncertainties and over the past few days, it has dipped around 6%.
Therefore, as I look to add quality stocks to my portfolio, what sectors should I be looking at and what stocks should I buy?
Oil stocks
Companies such as Shell and BP have been fairly immune to the recent FTSE 100 downfall. This is because, whereas most companies have been struggling with the impacts of inflation, they have been benefiting from the high price of oil. For example, BP reported an underlying replacement cost profit of $6.2bn, whereas Shell had adjusted earnings of over $9bn. These are exceptional results for the oil giants, meaning that they have been able to deliver outstanding shareholder returns in recent months.
There are also no signs that the price of oil is going to crash any time soon. In fact, JP Morgan states that it should hit $125 per barrel this year, rising to $150 per barrel in 2023. The current price of oil is around $120 per barrel. Therefore, it seems that oil stocks will continue to be able to outperform the FTSE 100 in the next couple of years.
However, I am still not going to buy oil stocks. This is because I am not convinced about their long-term future, as a transition to renewable energy seems necessary for their survival. As Shell and BP remain reliant on high oil prices for the foreseeable future, and their transition to renewable energy is still in its infancy, this deters me from buying right now.
Financial stocks
Although financial institutions are struggling with economic concerns at the moment, I am still buying for two reasons. Firstly, the current macroeconomic environment, whereby the Bank of England is raising interest rates, is a positive for banks. This is because it increases the profit margins on lending. For this reason, I see financial stocks as a fairly defensive option in the Footsie right now.
Secondly, these banks are trading at very low valuations right now. For instance, Barclays has a price-to-earnings (P/E) ratio of under 5 and Lloyds has a P/E ratio of around 6. Compared to other FTSE 100 stocks, these are extremely low. Therefore, even though I already own Barclays shares, I’m tempted to add more financial stocks to my portfolio.
Beaten-down FTSE 100 stocks
Finally, I see plenty of opportunities among beaten-down Footsie stocks. For instance, Mondi — a packaging company — has sunk 25% in the past year. This has been driven by its operations in Russia, which have accounted for 20% of profits over the past three years. However, in the recent Q1 trading update, underlying EBITDA reached €574m, a 63% increase year-on-year. Therefore, Mondi’s recent dip does not correlate with the business performance, and I have been using the dip to buy.
