Back in February, the FTSE 100 traded above 8,000 points. At that point, many were expecting a market boom that could carry the UK’s top index significantly higher. But that hasn’t materialised with the index now lower and plenty of cheap shares on the radar. However, I think with the current outlook we could be ready for a market rally next year.
Get the thinking cap on
The first step I’d take to get ready would be to assess which areas of the market stand to outperform the most. It’s true that a rising tide lifts all boats, but this doesn’t mean I should simply buy an index tracker fund.
Instead, I’d be focusing on areas such as luxury goods and consumer marketplaces. A boom next year would likely be due to inflation rapidly falling and maybe even the Bank of England cutting interest rates. This boost to sentiment would see consumers more confident in making spending choices.
I think this would help stocks like Burberry Group that specialise in high-end clothing and accessories. I believe people would also be more confident in making larger purchases that they’ve been holding off on. So Rightmove as a property portal and Auto Trader as a car marketplace should benefit.
Sifting through the ideas
After gathering the information, I next want to see which of the stocks are currently cheap. After all, if a company is potentially overvalued right now, the share price is going to struggle to meaningfully rally during the good times. Or if it does move higher, the gains could be limited in comparison to an undervalued peer.
I accept that calling a stock cheap is subjective. But there are different ways of getting a good feel for things. For example, let’s go back to Burberry. The share price recently hit 52-week lows, with the stock down 5% over the past year. The price-to-earnings ratio is 14.42, which is broadly the same as the FTSE 100 average of 13.14.
Therefore, I’d put Burberry in the category of being a share that certainly isn’t overvalued. The 52-week low dip could be a perfect time for me to buy the stock in anticipation of a broader market rally in 2024.
I can afford to be wrong
One of the great things with this strategy is that even if I’m wrong in thinking a rally is coming next year, buying cheap shares shouldn’t materially hurt me.
Granted, there’s nothing to say I might have to hold on to an unrealised loss if the stock continues to tumble in the short term.
But purchasing a stock that’s flashing up as undervalued should return to a fair value in the long run. This might not happen next year if we get some unexpected bad trend in the economy. But, over time, history shows me that good companies do move to the top.