The FTSE 100 opened in 2021 at 6,571 points, a disappointing drop of 16% in a year. Nevertheless, I think it stands to make a great recovery in 2021 and here I’ll explain why.
The pandemic caused division in the stock market as some company share prices rocketed, while others sank. This was particularly prevalent in the FTSE 100.
US stock market bubble
Meanwhile, in the US, share prices have reached astronomical valuations and any company that has the potential to go the distance seems to have its next decade of profits and more priced-in. Clearly that’s not sustainable and makes for a bubbly situation in the S&P 500. Tesla is a case in point with a price-to-earnings ratio (P/E) of 1,425! To put this in perspective, Billionaire investor Warren Buffett traditionally looks for a P/E below 10 when seeking value shares.
However, although high P/Es are also seen with a few of our FTSE 100 favourites, many UK share prices remain suppressed. This is the culmination of four years of Brexit pressure, followed by the Covid-19 uncertainty. Now we’ve reached 2021, Brexit has happened, and the vaccine rollout means Covid-19 should be brought under a certain level of control. I think cheap UK shares are ripe for the picking.
FTSE 100 favourites
The FTSE 100 is largely considered to hold the least risky UK equity investments. That’s because it contains the largest 100 UK-listed companies by market capitalisation. Many of these have an international presence and while none are too big to fail, many of these are decades old and highly regarded.
Lockdown 3 (so far) hasn’t caused the UK markets to despair. In fact, the FTSE 100 is up 4.5% year-to-date. Today, Unilever is the largest company (by market cap) trading on the London Stock Exchange. Throughout most of 2020, it was AstraZeneca, and prior to that it was Royal Dutch Shell. Fortunes change and shareholders shift their allegiances.
Being one of the biggest Covid-19 vaccine manufacturers around, it made sense for AstraZeneca to be in first place last year. But now we’re back in lockdown, Unilever has pipped it to the post. The FTSE 100 consumer goods giant saw its sales of cleaning and home cooking products surge in the last lockdown, and we expect this trend to continue. Shell, on the other hand, lost its crown in the oil price crash. Nevertheless, I’m bullish on oil stocks, tech, health and materials as we emerge from the pandemic to living in an innovative new world.
Research and plan to buy and hold
While starting 2021 in yet another lockdown is far from ideal, it gives investors a chance to research and plan. Although the latest virus strain is rampaging across the country, the fast vaccine rollout should bring things under control by the summer or earlier. This will then allow the country to begin rebuilding and fortunes can be grown.
As British consumers have shown time and again, they can and do adapt with relative ease. Supermarket sales soared in December, reaching a record-breaking £11.7bn.
While 52 FTSE 100 companies cancelled, cut or suspended their dividends in 2020, many of these will aim to reinstate them in the coming months. For example, housebuilder Barratt Developments intends to do just that. I still think a buy-and-hold approach to investing is the best approach, and those stocks with dividends offer the best way to build wealth.
Kirsteen owns shares of Royal Dutch Shell B. The Motley Fool UK owns shares of and has recommended Tesla. The Motley Fool UK has recommended Unilever. 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.