This year has been more good than bad for the stock markets. The FTSE 100 index was up almost 3% from where it started the year, indicating that it has managed to hold on to its gains even if the stock market rally has stalled.
I think we are poised for it to resume in 2021, though. There are three reasons why I think so.
#1. Growth forecasts upgraded
The Organisation for Economic Co-operation and Development (OECD) just upgraded its global economic growth forecasts. The inter-governmental organisation, that brings together 37 of the most developed economies, now expects the world economy to increase by 5.6% this year and 4% next year. This is a sharp improvement from its earlier forecasts.
The fact that the last time the world economy grew by 4% was back in 2011, puts the number in perspective. Even if we attribute 2021 growth to a recovery from the slump of last year, continued growth in 2022 does indeed sound positive.
Typically, growth booms accompany robust stock market activity as well.
I would think that FTSE 100 companies that get significant revenues from more than one geography can benefit most from a global growth trend. FTSE 100 consumer goods and mining companies like Unilever, Anglo American, and Rio Tinto would be my picks.
#2. FTSE in focus
In particular, the OECD has upgraded the UK’s growth rate this year by almost an entire percentage point to 5.1% owing to the speedy vaccine rollout. Deutsche Bank economists, too, have recently expressed a bullish view on the UK economy. Higher savings can lead to more spending post-lockdown according to them, resulting in a 0.5%–1% GDP boost.
I think this supports the potential for a FTSE stock market rally further.
The one sector that I think can rally quite a bit is construction. This is because it is the only sector to have shown growth in the UK in January this year as the country went into the third lockdown as per the UK’s national statistics released yesterday.
I would follow FTSE 100 construction related companies like CRH and Ashtead now.
#3. Supportive policies can drive a stock market rally
Government policies can further continue to support growth. The UK’s latest budget has supported both consumer spending and real estate. This alone can buoy the UK’s stock markets further. I am keenly looking out for further developments in FTSE 100 and FTSE 250 property stocks like NEXT, Persimmon, and Bellway, as examples.
The US fiscal stimulus can further benefit them, through spillover effects from the world’s largest country economy. I think FTSE stocks that cater to the US markets could gain as a result. An example would be Cineworld.
Investing for the long term
Even though all signs point in the right direction, I think we should still invest based on the long-term prospects of individual stocks. This can ensure that our invested capital can grow even if there is no stock market rally around.
Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK owns shares of Next. 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.