The FTSE 100 fell again today, leaving the index 9% below its 52-week high. The index passed below its previous low for the year, set back in March.
I think the current level of the index provides a decent entry point for investors. But with an uncertain macroeconomic outlook, they might have to be patient in the near future.
Outlook
The first thing for investors to note is there are some significant headwinds facing the FTSE 100 at the moment. Inflation, rising interest rates, and an investigation into the banks are all challenges.
At over 8%, inflation in the UK is still way above the Bank of England’s target of 2%. This provides a headwind for the UK businesses both by reducing consumer demand and increasing supply costs.
As a result, interest rates are continuing to rise and are forecast to reach 6% by the end of the year. This makes for higher returns from cash and bonds, creating downward pressure on share prices.
Furthermore, the Financial Conduct Authority is currently investigating Barclays, HSBC, Lloyds, and NatWest. The focus is on the banks making huge profits as borrowers struggle with mortgage repayments.
The prospect of tighter regulations could be a big headwind for these stocks. And the fact that they account for 10% of the index makes this a significant risk going forward.
Over time, the index has generally presented decent returns. But investors looking to buy into the FTSE 100 today might need to have a long-term outlook.
Buy high, sell low
There’s another issue with buying into the index that investors will need to be aware of. There’s a constant risk of buying high and selling low.
For example, at the end of 2022, Rolls-Royce accounted for 0.4% of the FTSE 100. Since then, the share price has increased by 50% and the stock is now 0.66% of the index.
By contrast, Persimmon has seen its share price fall by 24% since the start of the year. As a result, the stock has gone from taking up 0.2% of the index to 0.17%.
A fund aiming to track the index would typically rebalance its holdings every three months or so. This would involve buying shares in Rolls-Royce and reducing its stake in Persimmon.
The trouble is that this involves buying stocks that have become more expensive and selling ones that have become cheap. And this reduces the chance of buying shares when they’re undervalued.
Investing in the FTSE 100
The FTSE 100 has historically produced good returns for investors and I see this continuing. Investors might need to be patient, but I think they can expect decent returns over time.
The issue of buying shares that are more expensive than they were and selling ones that have become cheap is common to all index funds. And it puts me off investing in the FTSE 100 Index as whole.
Instead, I’m looking to find individual stocks to invest in at bargain prices. And the low level of the index means I think I have an unusually good chance of doing just that.
