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I reckon these dirt-cheap FTSE 100 stocks could lead the next stock market rally

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If the UK’s vaccine success helps us beat the pandemic, I reckon FTSE 100 stocks could fly. I also think the best time to buy is before the recovery, while they are still relatively cheap.

I feel the FTSE could bounce back faster than many markets, having underperformed since the EU referendum in June 2016. It did particularly badly last year, as the pandemic hit Britain hard and fears of a no-deal Brexit grew. While the S&P 500 climbed 18.4% in 2020, the FTSE 100 fell 14.3%.

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Another reason for this underperformance is that the S&P 500 is full of trillion-dollar tech titans like Amazon, Apple, Microsoft and Google-owner Alphabet. By contrast, the FTSE 100 has outsized exposure to two sectors that found the pandemic tough – energy companies and banking. I have just written about the patchy prospects for oil majors BP and Royal Dutch Shell, but today I’m interested in the big banks.

Banking dividends will be back

I was talking to Richard Hunter at Interactive Investor, who reckons FTSE 100 banking stocks look attractive, particularly for income seekers. 

Financial firms made £16.6bn of dividend cuts, after the Prudential Regulation Authority (PRA) told them to reserve capital for lending. Hunter says the Q3 reporting season shows banks are adequately capitalised and capable of resuming dividend payments. Most expressed a desire to make shareholder payouts at their upcoming full-year results.

Barclays, HSBC HoldingsLloyds Banking GroupNatWest Group and Standard Chartered could be in a nice position to do that. Especially if the vaccine rollout drives a faster recovery, and reduces impairment provisions.

If the FTSE 100 banking stocks resume payouts at their former levels, investors will be in for a treat. Interactive Investor figures show that last March, Lloyds yielded around 10%, Barclays 9.6%, HSBC 8.2%, Standard Chartered 4.4% and NatWest 4.3%. But of course, a return to such lofty figures might not happen.

Hunter named NatWest as his share to watch. Its stock is up 62% since its September low which could signal a rosier future for the beleaguered bank.

FTSE 100 stocks are great for dividends

Link Group’s CEO for corporate markets Susan Ring is also optimistic about banking dividends. She reckons banks will restore dividends faster than oil and mining companies will. They may only partially restore them this year but what really matters is “how quickly they do so, rather than exactly how much they pay”, she says.

Of course, the big banks are not a surefire bet, FTSE 100 stocks never are. If mutant Covid slows the recovery, they will bear the brunt of the economic slowdown. They have also underperformed since the financial crisis, as it has taken them more than a decade to sort out their balance sheets.

They also face individual challenges. HSBC, for example, is being squeezed between a US rock and a Chinese hard place, and faces difficult moral choices as Beijing’s comes down hard on customers in Hong Kong.

I plan to get round these risks by investing in these FTSE 100 banking stocks for the long term to iron-out any short-term issues. To retirement and beyond, in my case.

This stock also tempts me.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon, Apple, and Microsoft. The Motley Fool UK has recommended Barclays, HSBC Holdings, Lloyds Banking Group, and Standard Chartered and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. 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.

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