At the start of every year, it’s common to see plenty of stock market forecasts. Already this year, I’ve read many 2021 predictions for the FTSE 100 index.
Personally, I think trying to predict what level the FTSE 100 will finish the year at is a pretty pointless exercise. That’s because, realistically, no one has any idea where it will end up. That said, I do have a number of more general predictions for the Footsie in 2021. Here’s a look at what I expect.
FTSE 100 prediction #1
My first prediction for the FTSE 100 is that 2021 will be a better year for dividends. Last year was an absolute shocker for dividends. Over 50 companies in the index cut, suspended, or cancelled their payouts. This year, we should see more stability on the income front.
Already, many FTSE 100 companies have announced they will be resuming payouts. Others will most likely do the same shortly. Encouragingly, the Bank of England has lifted its ban on bank dividends, meaning that UK banks such as Lloyds and Barclays could resume their payouts this year.
It’s worth pointing out that some dividend payouts from FTSE 100 companies may not be as generous as they were. Some companies are likely to use the disruption as an opportunity to reset their payouts. However, overall, dividend payments should be up significantly on last year.
My second prediction is that we’ll see at least one stock market pullback or ‘correction’ of at least 10% at some stage in 2021. There are a few reasons. One is that there’s a lot of optimism in the market right now. A little bit of bad news could impact sentiment towards shares significantly.
Another is that Covid-19 is far from over. Many businesses are likely to continue experiencing challenges this year. A third reason is that there are pockets of the stock market that are in bubble territory right now. A significant pullback in these areas of the market could hit the FTSE 100.
Investors shouldn’t fear a pullback. Corrections are a very normal part of stock market behaviour. It’s worth being prepared for one though, and having some cash on the sidelines to be able to take advantage of lower share prices is a shrewd move.
Finally, my third prediction is I don’t think the FTSE 100 index, as a whole, will generate the strong growth some investors expect. The reason is the FTSE 100 contains a large number of companies facing big challenges and struggling to generate any growth at the moment.
Companies such as Royal Dutch Shell, Vodafone, and BT Group are examples. The performance of these kinds of companies has weighed the index down in recent years and this could continue in 2021 and beyond.
Given the composition of the FTSE 100, I see it very much as a stock picker’s index. Instead of owning the whole index, through a tracker fund, I think it’s a much better idea to pick out the best stocks and own these shares individually.
Edward Sheldon owns shares in Lloyds Banking Group and Royal Dutch Shell. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.