Having breached the 7,000 barrier last week, I’ve begun to wonder when (and if) the top tier of UK businesses — the FTSE 100 — will eclipse its 2018 all-time high (7,903) and perhaps even charge across the 8,000 boundary.
Today, I’m looking at few arguments for why this may and may not happen in 2021.
FTSE 100: reasons to be bullish
There’s certainly no shortage of reasons to think that recent momentum might continue.
Regardless of anyone’s political persuasion and views on the overall handling of the pandemic, I don’t think there can be much doubt that the UK’s vaccination programme has been a success relative to many other nations. On paper, this should breed confidence in the ability of the economy to recover strongly.
Naturally, the more home-focused FTSE 250 gains the most here (demonstrated by its own new all-time high). Even so, there’s no lack of London-listed giants that stand to benefit from this positivity. Drinks firm Diageo should see better numbers as bars and pubs fully reopen. If last week’s great unlock is anything to go by, Primark-owner Associated British Foods should see a swift rebound in business. Gambling behemoth Flutter Entertainment stands to gain as people are allowed back in sporting venues.
Despite the 41% gain seen in the top tier since markets hit the bottom in March 2020, I think UK blue-chip stocks still offer good value. That’s even if they arguably aren’t as innovative and disruptive as the US tech companies are. Even so, I’d much rather buy great defensive businesses at a reasonable price than a loss-making stock at a gravity-defying price.
Then again, there are a few reasons to be cautious.
Dips in the road
For one, it’s important to recognise that many of the FTSE 100’s members do most of their business overseas. That’s clearly handy at times when UK plc is in the doldrums. I only need to look back at how share prices reacted during the Brexit process for evidence of this.
Then again, I need to consider the probability that our biggest companies will be held back by negative coronavirus news from abroad. Airlines such as IAG will naturally weigh on the index. So too will Intercontinental Hotels Group and engine-maker Rolls-Royce.
Another thing worth remembering is that a few sectors are heavily represented in the FTSE 100. These are finance, mining and oil and gas. If we believe that the FTSE 100 is only going up then we must also believe that the same applies to things like commodity prices. The excitement over renewable energy and electric cars could support this. Alternatively, this may priced-in to stocks like BHP Group already.
The FTSE 100 at 8,000? I’m can’t say it won’t happen in 2021. Nonetheless, another 14% gain or so from here in the next eight months is a big ask. That’s why I think staying the course is more important than setting arbitrary targets.
Equities are likely to remain the ‘best show in town’ for long-term investors. So, while no one can say for sure whether the FTSE 100 will eclipse previous all-time highs this year, we can hope that this record will be beaten eventually. And in the meantime, those invested in individual stocks or a cheap FTSE 100 exchange-traded fund can enjoy the dividend stream that holding shares (usually) provides.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of Flutter Entertainment. The Motley Fool UK has recommended Associated British Foods, Diageo, and InterContinental Hotels 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.