UK stocks are promising. Forecast for FTSE 100 as of 24.07.2023

2023.07.24 2023.07.24
UK stocks are promising. Forecast for FTSE 100 from 24.07.2023

Dmitri Demidenkohttps://www.litefinance.org/blog/authors/dmitri-demidenko/

The UK shares look cheap, but investors do not want to buy the FTSE 100. What is the reason? What will change in the second half of 2023? Let’s discuss the Forex outlook and create a business plan.

Quarterly FTSE100 fund forecast

Buy low, sell high. This is how investors usually work, but surprisingly, they don’t want to buy cheap UK stocks. Since the beginning of the year, the FTSE 100 increased by only 2.7%, lagging behind S&P 500 (+18%), the Nikkei 225 (+25%), and the Nasdaq Composite with its +34%. Buyers may not move forward due to fears of a UK economic recession. However, things are not better in Germany, and the DAX gained 16% since the beginning of the year. What is the problem? Why are investors ignoring UK stocks?

Looking at the performance of the FTSE 100, it can be argued that the British stock index missed the start of the party, and only a sharp drop in the inflation rate created a kind of momentum. The decrease in consumer price growth in June to 7.9% triggered the stock market rally. However, the deviation of the actual data from the forecast of Bloomberg experts of 8.2% does not look so great. At the same time, British inflation is still higher than in the United States or in the euro area.

Inflation in the United Kingdom, the United States and the Eurozone

source: Financial Times.

In fact, the derivatives changed the expectations for the BoE rate ceiling, which had the biggest impact on the market. Before the release, the rate ceiling was at 6.75% and fell to 5.8% after it. This is an important difference that sent up the FTSE100.

The point is that the structure of the UK stock index is dominated by the actions of companies involved in real estate, construction, as well as other sectors of the economy that are sensitive to interest rates. Investors were scared because fixed mortgage rates should soon turn from 1.5% to 5-6%. Unsurprisingly, 21% of investment managers use less investment in UK equities than required by benchmarks. For comparison, the figures for the United States and the euro area are 10% and 1%.

The UK market, with its P/E ratio of 9.7, looks much cheaper than the European or US, with 13 and 24, respectively. According to Prime Minister Miton, the cost of companies in the UK is underestimated by 20%-30%, but they do not perform 20%-30% worse than their peers from other countries.

Together with an important part of tax-sensitive equity issuers in the structure of the FTSE 100, a strong pound was a major driver of the stock index’s weakness. Expectations of an increase in the Bank rate to 6.75% made sterling the top performer of the G10. According to UBS Wealth Management, a 10% strengthening of the sterling leads to a 7% fall in the share index because 2/3 of the company’s profits come from abroad.

Dynamics of GBP and FTSE 100

source: Business Economics.

Quarterly FTSE 100 business plan

I believe that a sharp fall in the inflation rate has shown that the problems of this country are not unique. A further revision of the Bank exchange rate ceiling will support the FTSE 100 rally Shares of the British companies are undervalued and look promising for buying. I recommend buying the stock index with targets at 7850 and 8000.

FTSE price chart in real time mode