After trading above 10,900 points at the end of February, the FTSE 100 index has experienced a sharp decline in recent weeks. Granted, there’s a lot of ongoing uncertainty with the situation in the Middle East. Yet I don’t believe I’m the only investor who sees the dip in the index as a buying opportunity right now. Here’s why.
Noting the outlook
The first factor is the premise that the conflict in the Middle East could end sooner rather than later. This has been the primary reason behind the short-term correction in the FTSE 100. Yet I don’t think it’s in any of the key parties interests to have a long, drawn-out conflict. If the situation can be resolved in the coming weeks, it should help the stock market rebound in several ways.
Oil prices should fall, easing inflationary pressures. This would calm investor nerves about the potential for interest rate hikes, which are typically negative for the stock market. Easing energy prices also helps companies to protect profit margins and therefore future earnings.
Another reason why I think now could be a good time for me to buy is that if we rewind to last month, the index was pushing record highs. Long-term sentiment around the UK market is positive, given its structural cheapness relative to markets like the US. This discount exists partly because global investors have ignored UK markets for years due to Brexit uncertainty and slower growth. But this is now changing.
When I put these factors together, I’m not sure we’ll see the FTSE 100 trade at such attractive levels for the rest of the year. Of course, I can’t predict future black swan events, such as new conflicts, more US trade tariffs, or other issues. This needs to be appreciated as a risk going forward.
Distilling it down
I need to take my high-level view down to specific stocks. One on my watchlist is Diageo (LSE:DGE). The stock has fallen by 16% over the past month amid general market uncertainty.
The stock has been caught up in a broader move lower over the past year, with the share price down by 30% over this period. Factors including weaker demand in key markets, macroeconomic uncertainty, and tariffs have all negatively impacted the company.
However, I think the company now looks fundamentally undervalued. Earlier this month, it hit its lowest level in over a decade. Yet the recent interim results showed some encouraging signs. Africa posted organic net sales growth of 10.9% for the period, with Europe up 2.7% on “continued strong Guinness momentum”. Johnnie Walker, as a product line, also delivered organic volume and net sales growth.
I believe that these key product lines can help the business during this difficult period. Then, as economic conditions ease, I’d expect demand to increase for more luxury brands in the portfolio. Even before that becomes manifest, I think some investors will see the extent of the fall recently as pushing the stock into value territory and look to snap it up with a long-term vision. Therefore, I think it could be considered.
