Is It Prime Time to Buy the FTSE 100?
- John Choong
- Nov 22, 2024
- 4 min read
The FTSE 100 is less than 200 points away from hitting its all-time high of 8,456. Should investors buy into the index today?
Tale of Two Markets
The FTSE 100 isn't known for its strong returns, let along its outperformance against its US counterpart, the S&P 500 in recent years. In fact, over the last 23 years, the UK's premier index has only outperformed its peer on five occasions (2022, 2016, 2008, 2007, and 2005). Nonetheless, the FTSE still has its merits and has the potential to outperform the US index, especially during times of weakness and volatility.
Despite the FTSE 100's tendency to underperform, however, we at Investors Edge remain bullish on UK equities for two main reasons － the valuation gap (UK stocks are much cheaper than the US) and the potential for both the UK and Chinese economy to rebound. As a matter of fact, the latter would positively impact almost a third of the FTSE's constituents by weight.
Sterling Performance Expected
In January, before Investors Edge was founded, I personally made a call that the FTSE 100 would finish the year above 8,000 points. This call was made purely on the valuation gap, as UK-listed companies have seen their share prices fail to keep up with earnings growth over the past few years. As such, we're now projecting the FTSE 100 to finish 2024 on at least 8,600 points, presenting an approximate 4% upside from its current levels.
Tip: The FTSE 100 hasn't matched its earnings growth in recent years due to multiple contraction (investors pay less for growth resulting in lower valuations). This happens when sentiment sours because of low confidence in a sector, country, company, or all.
Sector | Weight | Projected Earnings per Share (EPS) Growth (2023 > 2024) |
Healthcare | 14.15% | 30% |
Industrial Goods and Services | 13.18% | 8% |
Energy | 13.00% | -5% |
Banks | 11.43% | 15% |
Basic Resources | 7.50% | 0% |
Personal Care Drug and Grocery Stores | 6.99% | 3% |
Food Beverage and Tobacco | 6.75% | 15% |
Financial Services | 6.12% | 5% |
Media | 5.30% | 5% |
Utilities | 4.20% | 5% |
Insurance | 2.99% | 50% |
Travel and Leisure | 1.69% | 23% |
Consumer Products and Services | 1.68% | 20% |
Telecoms | 1.35% | -30% |
Real Estate | 1.30% | 30% |
Retailers | 1.27% | 8% |
Technology | 0.75% | 50% |
Chemicals | 0.35% | 3% |
Total/Weighted Average | 100% | 11.5% |
On that account, assuming the FTSE 100 continues to trade on a similar multiple and grows EPS in line with our projections, it should finish the year c.11% higher from 2023. This will be mainly driven by banks, real estate, financial services, housebuilders (Consumer Products and Services), and tech, particularly as interest rates begin to ease. Meanwhile, food, retailers, and personal care will also spur modest growth as the cost-of-living crisis eases.
Additionally, the momentum from travel is expected to carry over from 2023, based on forward bookings and consumers' spending intentions. Moreover, promising drugs such as the RSV vaccine and several cancer treatments have come through the pipelines of AstraZeneca and GSK, spurring healthy earnings growth in Healthcare － although recent lawsuits and lacklustre guidance for 2025 have seen their share prices weaken lately.
On the flip side, telecoms giants BT and Vodafone have had their earnings contract rather substantially. This has come as a result of higher capital expenditure for BT and poor sales for Vodafone in their German and European markets. Further, energy and utilities have also been dragged down, largely by lower oil and gas prices throughout 2024, along with a weak Chinese economy, which has sunk miners (Basic Resources) down as well.
What Next for the FTSE 100?
Looking forward, we are cautiously optimistic on the FTSE 100. Our investment thesis remains in tact going into 2025, as we continue to believe that the valuation gap presents a promising opportunity for investors. Not only that, we also think that the historical tendency of a Santa Rally to occur on election years will allow the UK's main index to finish 2024 strongly and start the new year on the front foot.
Tip: The Santa Rally is a phenomenon where stocks have a high likelihood of increasing in value on the last five trading days of the current year and first two trading days of the new year.
Having said that, 2025 does present a mixed picture based on historical trends. Since 1988, in the year after an election, the FTSE 100's performance has been quite hit-and-miss. Nonetheless, one thing that can't be ignored is the relationship the FTSE has with the S&P, as their performances over the past two decades have been closely linked. Hence, there's an argument to be made that it's worth paying more attention to the outlook for the S&P 500.
So, what's in store across the pond? Well, a trend worth noting is that since since 1981, the S&P has been positive 9/11 times in the year after an election, with an average gain of 16.1%. The two times it failed to do so was due to the Dot Com bubble bursting in 2001 and the inflation recession in 1981. But with Wall Street having rescinded their recessions calls to c.15% recently, the outlook for the S&P, and thereby, the FTSE looks brighter.
Thus, our base case is that the FTSE 100 will push higher in 2025 as we don't see a US recession as likely. We believe a combination of historical trends and earnings growth will support our thesis that the FTSE will head higher, leading to decent investment gains if investors buy today. Although, this will also be partially reliant on four main factors, which will also have the potential to trigger further outperformance:
A rebounding Chinese economy.
The US not entering a recession.
The UK growing from cooler inflation as well as lower interest rates.
The FTSE 100's earnings multiple remains the same.
*Any forecasts and commentary are opinions and analyses based on available data at the time of publishing, which may prove incorrect. This content is for informational purposes only — please consult a qualified financial advisor for personalised investment advice.
