The stock market rallied this week as the US and Iran announced a temporary ceasefire. That expires 10 days from now.
This gives both sides time to negotiate over US sanctions and Iranian nuclear capacity. But what happens after this?
Negotiating window
The pause in hostilities is a temporary negotiating window. And potential outcomes fall into three main categories.
The most optimistic is a nuclear deal. This involves limits on Iran’s uranium enrichment and the lifting of US oil and banking sanctions.
The worst-case scenario is a return to open conflict. It’s not at all clear that this benefits either side, but it’s impossible to rule out.
Somewhere in the middle is an extension to the negotiating window. That might be the easiest politically (and therefore most likely) result.
The range of outcomes makes forecasting the stock market’s next move tricky. But the good news for investors is they don’t have to.
Investing endgame
Investors need to think about two things. One is where share prices are now and the other is where they’re likely to be when they want to sell.
What the path between those two points looks like doesn’t really matter. The FTSE 100 is up 71% (plus dividends) over the last 10 years. In that time, there have been some incredibly uncertain periods. The most obvious has been the Covid-19 pandemic.
Things moved quickly during that time. But investors didn’t need to be able to forecast what was going to happen in the next couple of weeks.
What they needed to know was that high-quality companies would do well over time. And that’s still the thing that matters most right now.
Quality first
One example from the FTSE 100 is Halma (LSE:HLMA). The firm is a group of businesses that make industrial safety products.
These operate in specialist niches, which limits competition. And their products are often required to meet increasingly strict regulatory standards.
This makes the firm extremely hard to disrupt, but it can also limit growth prospects. Halma, though, looks to address this through acquisitions.
Buying other businesses can be risky. And the company has started to pay higher prices for deals in recent years, which I’m a bit wary of.
That’s something to keep an eye on. But in terms of a combination of resilience and strong growth prospects, I think Halma is hard to beat.
Focus on what matters
At times like this, it’s easy to get caught up in short-term thinking. There’s a lot going on and it’s having a big effect on the stock market.
Ultimately, though, the next 10 days probably matter less than investors think. The more important thing is finding the right companies to invest in.
At a price-to-earnings (P/E) ratio above 40, Halma shares aren’t cheap. But investors need to note something important about this.
The firm’s free cash flow consistently exceeds its net income. And that means the P/E ratio isn’t the best metric to pay attention to.
On a free cash flow basis, the stock is more attractive. It’s still expensive, but I think it’s worth considering for long-term investors.
