‘Strong and steady’ would describe the performance of the FTSE 100 in 2021 so far. The share index has sat above 7,000 points for the best part of six months, and few could blame investors hoping for similar returns next year.
But will the FTSE 100 continue its fine showing in 2022? Or is it currently overvalued and set to crash? Here’s what I think.
What is the FTSE 100?
The FTSE 100 is a share index consisting of the biggest 100 companies in the UK that are listed on the London Stock Exchange. At the beginning of 2021, the share index was worth a tad above 6,500 points. Ten months down the line and the share index is now above 7,000 points.
Why has the index performed well recently?
The FTSE 100 is commodity-heavy, and analysts say that recent rises in the index have been down to the strong performance of BP and Royal Dutch Shell. Shares in both of these companies have risen by around 20% in the past month alone. The price of a barrel of oil is now at its highest level in seven years!
Big-name banks have also added to the FTSE 100’s strong performance in recent times. NatWest, Barclays and Lloyds have all witnessed a healthy rise in their respective share prices over the past month.
Will the FTSE 100 crash in 2022?
Any well-informed investor will tell you that the past performance of any stock is not an indicator of future performance. Therefore, it’s entirely possible that the FTSE 100 share index will tumble next year.
Here are three reasons why.
1. The impact of Covid-19 hasn’t been fully realised
The UK’s job retention scheme, also known as furlough, ended last month. It has been widely reported that mass job losses, which were initially feared, haven’t materialised. Yet I believe it’s far too early to assess the real impact of Covid-19 on the wider UK economy.
While job numbers have not been massively impacted, the overall cost of the furlough scheme has added billions to UK government debt. This means that going forward, the government will either have to massively cut back on public spending or further raise taxes.
Either of these actions will have a direct impact on jobs and consumer spending, which will undoubtedly impact businesses in the FTSE 100.
2. The housing market may be overvalued
House prices during Covid-19 have seemingly defied gravity, with the average price of a house now standing at a record £267,500.
However, I think house prices have room to fall in 2022. That’s because those who were driven to move house as a result of the ‘race for space’ have now moved. Similarly, subject to an unexpected government announcement, there will not be a Stamp Duty holiday in 2022, reducing the incentive for people to move home next year.
Perhaps an even bigger influence on house prices will be the behaviour of the Bank of England. If interest rates rise in 2022, then this will increase the cost of mortgages, putting pressure on house prices.
Lower house prices will negatively impact a number of companies in the FTSE 100, including big housebuilders such as Barratt Developments and Berkeley Group Holdings.
3. Inflation fears are very real
Inflation fears are on the rise. This puts pressure on the Bank of England to raise its base rate. While I’ve covered the impact this may have on house prices, it’s also worth bearing in mind that this action will also make it more expensive for businesses, including those in the FTSE 100, to borrow capital.
What else should you know about the FTSE 100?
While the FTSE 100 consists of companies listed on the London Stock exchange, its performance isn’t just down to the British economy. The global nature of the companies listed in the index means that it’s influenced by economies around the world.
It’s also worth bearing in mind that many people believe the FTSE 100 will rise in 2022. That’s because many think the FTSE 100 is undervalued, given that it was trading near to 50-year lows when Covid-19 hit. To put it into context, the index has only risen 20% since March 2020.
Put simply, there is no true way of knowing exactly how things will pan out. The only thing that is certain about the stock market is that it can deliver unexpected results!
How can you invest in the FTSE 100?
If you are looking to invest in the FTSE 100, you can do so in two ways.
You can buy the stock of a single FTSE 100 company, or companies through a share dealing account. Alternatively, you can open a FTSE 100 index tracker. To do this, you can choose an investing platform, such as Hargreaves Lansdown, and then select the appropriate fund.
Remember, you can lose money with any investing. If you’re new to investing, then take the time to familiarise yourself with the investing basics.
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