The economy continues to perform weakly. Many investors and analysts expect a recession in the US shortly, which could act as a further drag on world markets. It might seem sensible to imagine that, when the economy does badly, so does the stock market. But in fact, whether or not there is a recession, I plan on buying more FTSE 100 shares for my portfolio.
Here’s why.
Flight to quality
No matter how bad – or good – things get economically, many business sectors continue to tick over. People still shop at supermarkets. They still use water in their homes and businesses. Buses keep running and telecoms providers continue to keep millions of customers online.
Such industries often contain what are known as defensive shares, named for the idea that they can provide a defensive edge to one’s portfolio in a weak economy. The FTSE 100 is stuffed full of them, from the likes of Tesco and Sainsbury‘s to National Grid and United Utilities.
The mere fact of being a FTSE 100 member means a company is among the largest listed firms in the UK. Size alone is no guarantee of business quality. But I take the general view that for a company to be in the FTSE 100, it must have been doing something right over the years as it reached a certain size.
The time is now
But I do not buy such shares purely because they are in the FTSE 100. Even with a large blue-chip company, I always aim to buy into a great business at an attractive price.
Investor enthusiasm matters a lot — sometimes due to its absence. That helps explain why the price of a share can move around a fair bit even when the underlying business performance remains the same.
But many investors (including myself) are forward-looking. They try to buy into a business for how they think it may do in future, not simply how it is performing today. This means that when the economy is performing at full pelt again, a lot of FTSE 100 shares will likely already reflect that in their price.
So rather than wait for a humming business environment before buying, I am happy to add shares to my portfolio in advance. That is why I am investing right now, despite a lacklustre economy. Waiting for investor confidence to surge again could mean me missing out on some great bargains.
Getting paid to wait
In fact, I can see a number of bargains in the London market right now.
Quite a few FTSE 100 shares are trading on relatively cheap valuations given the quality of their businesses. Buying such shares today can hopefully let me benefit from their performance over the long term.
On top of that, with juicy dividends from FTSE 100 shares I own like M&G and British American Tobacco, I am effectively being paid to wait while I hold the shares in anticipation of their long-term performance!
