The FTSE 100 started the year at 7,384 and, 12 months later, remains stuck around the same level. Although disappointing, the index has outperformed most stock markets around the world, beaten only by India and Brazil.
What will happen to the Footsie next year?
Forecast
According to AJ Bell, the FTSE 100 will reach 8,250 by the end of 2023. The previous high for the index was 7,877 in June 2019. An increase of over 10% from its current level, and an all-time high, would be a good performance against a backdrop of gloomy economic forecasts.
With further interest rate increases likely, and inflation at historically high levels, the UK economy is expected to shrink next year. Despite this, Russ Mould, AJ Bell’s investment director, believes confidence in the boardrooms of FTSE 100 companies remains high. He points to a record-breaking £55.2bn spent on share buybacks in 2022, and £81.9bn paid in dividends, as evidence.
Constituents
To really understand how the FTSE 100 will perform in 2023, it’s necessary to consider the sectors in which the companies that make up the index operate.
The Footsie is dominated by energy giants, miners, and financial services companies. According to forecasts complied by MarketScreener, these will contribute 63% of all pre-tax profits in the FTSE 100 next year.
Both Shell and BP have seen their share prices rise by more than 40% during 2022. However, they are down 9% and 7% from their 2022 highs. A cold winter and a continuation of the war in Ukraine could easily see oil and gas prices soar once more.
I believe banks will soon start to see the benefit of rising interest rates. The net interest margin is the difference between the amount earned on loans and that paid on deposits. All banks in the FTSE 100 have recently reported increases in this key metric. Although I expect some of the benefit will be lost through customers defaulting on their loans, earnings should rise next year.
Banks in the FTSE 100 have had a mixed 2022. The share prices of NatWest and HSBC have out-performed the index as a whole. In contrast, those of Lloyds and Barclays are down 6% and 15%.
Although the share prices of mining companies can be volatile due to movements in commodity prices, they have traditionally paid healthy dividends. For example, Rio Tinto is currently yielding over 10%. Returns like these should support growth in the share prices of companies in this sector.
Reasons to be cheerful
I’m therefore optimistic about the prospects for the FTSE 100 next year. But, it’s always important to take a long-term view. Since it started in 1984, the index has increased more than six times. However, it has fallen during 12 of those years.
However, if I had some spare cash, I would be looking to invest in the FTSE 100.
With so much economic uncertainty, investing in a FTSE 100 tracker fund would help me avoid having to choose individual stocks. Instead, my risk could be pooled across all 100 companies in the index. And, if AJ Bell’s forecast is correct, this would give me a return of over 10% next year.
