The FTSE has lagged its peers in recent years. One reason for that has been Brexit, as the last thing businesses and investors want is uncertainty.
However, there are reasons to believe that FTSE-listed stocks could actually perform rather well in 2024. This includes falling interest rates, and the relative resilience of the British economy.
Let’s take a closer look, starting with valuations.
Near-term valuations
UK-listed stocks tend to be much cheaper than their American counterparts. It’s not a perfect comparison as US markets do have a greater leaning towards growth-oriented companies, which trade with higher valuations.
However, this is broadly accepted when we compare near-term valuations in sectors like banking, insurance, and telecoms.
So what does this mean? Well, lower valuations suggest companies are trading below their fair value. This can present opportunities for investors looking to capitalise on potential market inefficiencies.
When a company’s stock is undervalued, it may offer a favourable risk/reward ratio, as the market may not fully appreciate its true worth.
Investors often use various metrics, such as price-to-earnings ratio and the price-to-book ratio to assess near-term value.
Interest rates
The relationship between interest rates and share prices is multi-faceted. Firstly, rising interest rates increase debt repayment costs for companies, impacting profitability and potentially lowering share prices for those with substantial debt.
Moreover, this can hamper growth as companies may defer taking on more debt to fund their growth ambitions.
Secondly, investors often reallocate capital based on interest rate movements. When rates are low, stocks become more attractive than fixed-income assets, boosting share prices.
Conversely, as rates rise, the allure of higher-yielding bonds or cash may prompt investors to shift from stocks, leading to a decline in share prices.
Monitoring interest rate changes is crucial for investors to anticipate potential impacts on corporate finances and to adjust their asset allocation strategies accordingly.
So with interest rates projected to fall in 2024, we could expect capital to move away from cash and debt and towards stocks.
Growth
Britain’s slow economic growth in recent years has posed challenges for investors as it can limit corporate earnings and market expansion.
However, the relative resilience amid the global slowdown suggests stability, potentially indicating a capacity to weather economic challenges and presenting opportunities for long-term investors.
There are also forecasts suggesting the UK will be Europe’s strongest economy over the next 15 years.
Nonetheless, the UK’s lagging growth versus the US could be cause for concern. It’s also reflected poorly in analysts forecasts for corporate earnings and growth.
Take a handful of UK-listed companies and look at average earnings per share growth over the next three-to-five years. It’s not very exciting.
But with interest rates due to fall by as much as 300 basis points over the next three years — a rate of decline not seen for decades — we may see a stock market bull run.
This could a once-in-a-decade opportunity for investors. A rare chance to build wealth, or even get rich.
