With the FTSE 100 trading near to where it started in January at 7,500 points, the performance this year has so far been flat. But on a 12-month basis, it’s up just over 5% before dividends. And while this may not be the most exciting return, it’s pretty close to the gains delivered by the UK’s flagship index pre-correction.
However, are these just a taste of far superior returns to come?
The stock market rebound isn’t over
On the surface, the FTSE 100 looks like it’s already completely recovered from the 2022 correction. After all, the index is at a level much higher than the lows of October. But upon closer inspection, there may be quite a way to go.
A lot of the recovery seen has actually stemmed from just a handful of companies, the most significant of which is AstraZeneca. The pharmaceutical giant is currently the largest enterprise inside the index. And since the FTSE 100 is market-cap-weighted, AstraZeneca has the biggest influence over its performance.
With a steady stream of new drugs receiving regulatory approval and new growth opportunities being untapped, investors understandably got excited. And that resulted in the biotech pharma group’s market cap climbing by over 25% in under six months.
Since then, excitement levels have come back down to earth, along with the AstraZeneca share price and the FTSE 100 level. But what about the other 99 constituents? Well, most have yet to make a complete recovery.
Not all of these firms are positioned to handle a high-interest-rate environment. But the few that are could help propel the index even higher in 2023 as their market cap expands along with their influence over their parent index.
Opportunities within the FTSE 100?
According to the Economic Forecast Agency, the flagship index is on track to hit as high as 8,538 points by May next year. Compared to current levels, that’s a growth prediction of roughly 13% before dividends, far ahead of the FTSE 100’s historical average of 8% including dividends.
As with any forecast, this needs to be taken with a pinch of salt. Forecasts are rarely accurate, and relying solely on them to make investment decisions usually ends up backfiring. At least, that’s what I’ve experienced.
However, it sheds some light on what could happen in the best-case scenario. And it suggests there are lucrative investment opportunities within the FTSE 100 today on which to capitalise.
What are the best shares to buy?
As the days of dirt cheap financing come to an end, some of the best shares to buy are likely to be the ones that are self-sustaining. Companies that aren’t reliant on debt to fund operations are less exposed to the impact of rising interest rates. And if their competitors are, then this internal funding flexibility will provide a significant edge in pursuing new projects to capture market share.
Obviously, there are plenty of other factors to consider when picking stocks. But by eliminating firms overburdened with loan obligations from consideration, the odds of stumbling on a long-term winner increases drastically, in my opinion.
