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Yesterday (14 July), the FTSE 100 traded above 9,000 factors. Regardless of some investor issues in regards to the well being of the UK financial system, I feel there are a number of the reason why the principle UK inventory market can push increased within the coming months. In actual fact, I’m not ruling out a transfer to 10,000 factors by the top of the 12 months. Right here’s why.
Worldwide publicity
I nonetheless really feel that some folks get confused by assigning an excessive amount of significance on how the financial system is performing in terms of the FTSE 100. Many of the large-cap shares inside the index are worldwide. They select to be headquartered within the UK, or listed right here. This doesn’t imply that the UK market is the biggest for the corporate, and even that it generates any significant income on our shores.
Though I’m not notably optimistic in regards to the UK financial system going ahead, I stay upbeat globally. The US is performing very effectively, regardless of issues about tariffs. China is exhibiting indicators of restoration. The European Central Financial institution committee is nearing completion of its rate of interest cuts, because it believes inflation is now underneath management. This bodes effectively for worldwide firms to develop their earnings this 12 months. It ought to filter right down to increased share costs, driving the index up.
Then again, a weakening UK financial system ought to trigger the British pound to depreciate. It may commerce right down to 1.20 towards the US greenback, which might mirror an 11% fall. Given that almost all FTSE 100 firms are web exporters, this would supply a lift of the same quantity to their earnings when they’re repatriated again to the UK. In concept, an 11% enhance within the earnings for the index may push the worth up. An 11% transfer would tally 10,000 factors.
Valuation metrics
The present price-to-earnings (P/E) ratio for the FTSE 100 is 16.5. Once I evaluate this to the S&P 500 at 29.9, it seems to be a cut price. If I assume the mixture earnings per share for the FTSE 100 stays the identical however the P/E ratio rises by 11% to 18.3, this is able to put the index at 10,000 factors. Even at that stage, it nonetheless could be valued decrease than the US, so I don’t really feel it’s an unrealistic expectation.
At a inventory stage, there are undervalued firms that would shine and act to assist push the index increased. For instance, Kingfisher (LSE:KGF) has skilled a modest 3% share value rally up to now 12 months. But, with a price-to-earnings ratio of 13.55, it’s under the index common. The retailing, DIY, and residential enchancment inventory can be a manner off its 52-week highs. Nevertheless, quarterly outcomes from Could confirmed robust UK and Eire income development of 6.1% in comparison with the identical interval final 12 months.
I feel the inventory can climb over the approaching 12 months. Additional rate of interest cuts are anticipated to result in increased demand for properties, pushed by decrease mortgage charges. By extension, this creates extra demand for residence enchancment tasks.
One danger is France, the place shops have been underperforming. The enterprise can’t simply depend on the UK market to cowl the shortfall going ahead. But on steadiness, I feel it’s a inventory to think about as a part of a broader transfer increased within the FTSE 100.
