The FTSE 100 is ending 2023 on an upbeat note after a positive November and December, but this will hardly go down as a vintage year. The blue-chip index is up 2.37% overall, ending the year trading at 7,733.24.
That’s a disappointment after a bright start, which saw the FTSE 100 breakthrough the 8,000 barrier for the first time, hitting 8,012.53 on 16 February. Sadly, that was as good as it got. By 7 July, the index slumped to a year-low of 7,256.94.
While the FTSE 100 moved mostly sideways, investors spent most of the year cheering on the ‘Magnificent Seven’ US mega-cap tech stocks. They drove the S&P 500 to a bumper 24.73% gain. However, it’s worth remembering that Wall Street crashed almost 20% in 2022, when London blue-chips didn’t.
Good but not great
The FTSE 100 is tech-stock-poor, with exceptions like software maker Sage Group and analytics specialist RELX. Instead, the index is rich in old-school banks, insurers and miners, which have been out of favour for years. The FTSE 100 trades at a price-to-earnings ratio of just 9.5 times, against a dizzying 26.35 times for the S&P 500.
Given the global popularity of US shares in general and tech in particular, I can’t see the two markets a trading on similar valuations. However, I expect the valuation gap to close, and the process could begin in 2024.
Global investors have been down on the UK since Brexit, as have UK investors, dazzled by Tesla, Nvidia et al. Yet many will look at today’s low valuations and wonder if they’re missing out. Especially with our economy expected to grow faster than Germany’s.
A 2024 election may deter some, but with Labour leader Keir Starmer and Shadow Chancellor Rachel Reeves working hard to reassure markets, I’m not too concerned.
9,000 might prove a stretch
UK shares should get a tailwind from falling interest rates. The FTSE 100 currently yields a solid 3.78%. Investors who buy direct equities will find a dozen stocks yielding 6% or more. One of my favourite holdings, Legal & General Group, now yields 7.71%.
That looked tempting when best buy savings rates and bond yields were hovering around the 5% mark. It will look even more attractive if they drop below 3%.
When investing, there are no guarantees. End-of-year forecasts are often laughably wrong. Everybody was expecting China to boom in 2023 as Covid lockdowns ended. It didn’t happen.
Yet I’d be amazed if the FTSE 100 didn’t hit a new all-time high. It only has to climb 3.62% to beat February’s peak. So what about 9,000? That requires a jump of 16.38% over the year. While I’m optimistic about the FTSE 100, I don’t think it’s got that much potential.
However, with dividends and share buybacks coming on top of any share price growth, I’m hopeful of a double-digit total cash return. Since I buy individual stocks rather than index trackers, I hope to do better than that. I have high hopes for key portfolio holdings 3i Group, Lloyds Banking Group, L&G, a resurgent Scottish Mortgage Investment Trust and Taylor Wimpey. Enough predictions. Now bring on 2024.
