FTSE 100: Crash, What Crash?

What’s next for the FTSE 100 index?

I am not entirely sure, but one Foolish colleague recently wrote that the benchmark index could reach 9,500 points. Another one argued that the FTSE could hit its all-time high at any time. 

If long-term trends are mimicked, however, there is also a possibility that the index may hit 3,500 in less than two years, a senior banker in the City also reminded me this week. Well, while I don’t think that such a worst-case scenario will materialise, investors ought to pay attention to certain risks, and may also want to keep a close eye on the stock performance of GlaxoSmithKline (LSE:GSK), Next (LSE:NXT), Ted Baker (LSE: TED) and Blinkx (LSE: BLNX).

Landscape

The European Central Bank proved on Thursday that it’s willing to do all it can to support growth. This, in turn, will favour the valuation of riskier assets in the UK, although decisive action from the Bank of England is needed for the FTSE to rise further.

First, the British pound trades high but could go higher. Second, the UK needs higher interest rates to attract investors and show the world that its stock markets offer plenty of upside, in my view. The problem is that nobody really knows if the UK can cope with higher interest rates and a strong currency.

In fact, if interest rates rise, the consumer will be squeezed, and big corporations may struggle with more expensive funding if funding costs aren’t properly hedged. A low interest-rate environment doesn’t support a significant rise in the benchmark index from its current level of 6,869, in my view. Moreover, buybacks activity is slowing and payout ratios are under pressure, evidence shows. Finally, the end of tapering in the US — is it priced in guys? — remains a serious risk to global markets as growth prospects in the US have not materially improved since the recovery began in late 2009. 

How To Play This Market

There are four stocks I would hold as part of a diversified portfolio at this point in time. They would make up to roughly 20% of my total bond/equity holdings.

Both Glaxo (8%) and Next (6%) are appealing in the current environment. If the FTSE 100 keeps rising, the shares of both companies will likely outperform the broader market. Glaxo offers yield, while Next is a growth play. Their shares should do well even if the market heads south.

Glaxo’s valuation has been battered as the company is faced with a bribery scandal in China, but its pipeline of drugs isn’t worse that that of its rivals, and shareholder value has been delivered in recent weeks of trading.

Next is a one-off in the retailer sector, and its shares have risen by 11% since July 10, when I wrote that they should have been considered. Glaxo is giving me more of a headache, but I believe it still offer plenty of value at this price. 

Ted Baker (4%) is a business whose valuation has suffered this year due to negative sentiment in the retail sector.

It offers growth, hefty operating margins and a strong balance sheet. I think Ted Baker stock could surge 10% to the end of year.

Just like Quindell, Blinkx (2.5%) is a high-risk bet, but at 35p a share it offers reasonable value. 

It‘s not an investment for the long term, but it could reward opportunistic investors hunting for bargains in the next six months. If the market rallies, it won’t remain oversold for long.