UK’s economy grew by 15.5% in the July–September quarter. This is the fastest rate seen since 1995. At any other time, this alone, in my view, would be enough to send the bulls charging back into the stock markets. The mood’s indeed bullish, to be sure. The FTSE 100 index has been gaining ground through November.
How much of that is because of the recent GDP report, however? Not very much, I’m afraid. The Biden bounce and hopes of finally getting past Covid-19 with successful vaccine trials had already improved investor sentiment. The GDP improvement hasn’t been able to add much fuel to the rally, because, despite the super positive headline number, there’s plenty to be cautious about still.
What’s the economy saying, really?
The first, is that UK GDP levels are still below the pre-coronavirus levels. Second, double-digit growth was driven by the easing in lockdowns. As business resumed, the GDP numbers naturally followed. It’s what economists like to call ‘base effect’. It’s easier to achieve high growth on a low base. And easy for growth to look subdued on a high base.
Third, the standalone numbers for September show that growth slowed down to a trickle. Fourth, with the lockdown in England underway in November, the final quarter of 2020 will be affected too. And finally, there’s still a lot of government support for jobs. Once this public spending starts tapering, the real economic impact of Covid-19 will become clearer. It could be far less than we fear, or more. We don’t know. And we won’t until at least the second quarter of 2021, when the furlough scheme is withdrawn.
How should I invest in FTSE 100 stocks now?
With the numbers a mixed bag, there’s both a pessimist and optimist in me. I think the way to invest in FTSE 100 stocks now, is to pacify both. Strangely enough, there are some stocks that cater to the impulses of both in these unique times. Consider healthcare stocks, for instance. Companies like AstraZeneca and Hikma Pharmaceuticals have gained this year as defensive plays when the bears took control of the stock markets.
Yet, the optimist in me still sees value in these stocks even after the mood has turned positive. This is because, one, the rising tide of investments has further improved their share price performance in the recent days. AstraZeneca continues to boast of a high price-to-earnings ratio of over 45 times. Hikma Pharmaceuticals’ share price is near all-time highs.
Second, Pfizer has a lead in the race for vaccine development. But other companies are playing their role too. AstraZeneca is developing its own Covid-19 vaccine along with the University of Oxford. This is expected to be far more affordable than the Pfizer vaccine. Hikma Pharmaceuticals has a contract to manufacture medication for Covid-19 patients developed by US-based Gilead Sciences.
Third, even before Covid-19, both companies had strong credentials. AstraZeneca was one of the most expensive FTSE 100 stocks even a year ago. Hikma Pharmaceuticals too, has shown strong share price growth as well as revenue increase. I think these stocks continue to be long-term winners, irrespective of where the economy is at.
