Yes, I know, the FTSE 100 has only just broken through 8,000 points, setting a new all-time record. And we might be wondering how long it will take to add another 1,000 points to reach 9,000.
But most of us who’ve watched the Footsie for decades will probably have expected 8,000 to have been beaten years ago. But a succession of crises have held it back, including the banking crisis, Brexit, Covid, war in Ukraine, recession…
It’s almost as if we’re making up for lost time now. So let’s be bold and think about what it would take for the top London stock market index to break into five figures. It would mean a 25% uplift for the value of the biggest UK shares.
I reckon two specific sectors look considerably undervalued now. Banks and housebuilders.
Undervalued
The FTSE 100 banking sector is currently on a forecast average P/E of only a bit over 6.5. It’s fair for banks to be more lowly valued in times of high inflation and recession. But if bank share prices rose by 25%, we’d be looking at a P/E of still only 8.2. And that’s without any rises in earnings.
Housebuilder earnings look set to decline next year, now we have a property squeeze on our hands. Forecasts put the big housebuilders on an average P/E of 12. But that’s for a down year, and it’s still below the index average.
With our chronic housing shortage, it can surely only be a matter of time before houses and builders get back on track. Getting back only as far as 2022 earnings, the sector P/E would decline to under eight.
Safe stocks
If undervalued sectors look like they could help to propel the FTSE 100 above 10,000 points, what about more highly valued shares?
I’d rate Unilever as one of the UK’s safest stocks. It manufactures essential good that people buy through good times and bad. And investors have put it on a long-term premium valuation. But it’s on a trailing P/E of only 16. Forecasts suggest it will rise to around 20 this year, but drop back again later. It was above 20 prior to Covid. With a dividend yield of 3.6% now, Unilever seems attractive to me.
So I think the depressed sectors in the FTSE are very cheap. And even a defensive stock like Unilever looks undervalued.
10,000
I can’t say when the FTSE 100 might reach 10,000. But I’m convinced it will, and it might not take as long as we’d think.
There are clear risks ahead. It might take years yet for us to pull clear of today’s economic difficulties. And who knows what the next crisis will be? I’m not making actual predictions anyway, and this is really just for fun. Still, amid the current economic gloom, I think it’s nice to be a bit optimistic for a change.
And when it comes to the long-term future of investing in shares, I remain strongly optimistic.
