With the FTSE 100 just 128 points (or 1.9%) off reaching 7,000 points for the first time, the psychological milestone of a record high does not appear to be too far away. In fact, the FTSE 100 may just need its two biggest stocks by market capitalisation (and therefore the two stocks that have the biggest impact on its price level) to edge higher in order for an all-time high to be declared.
And, with both HSBC (LSE: HSBA) (NYSE: HSBC.US) and Shell (LSE: RDSB) (NYSE: RDS-B.US) having the scope to move much higher, they could push the FTSE 100 well past 7,000 points over the next few months. Here’s why.
Valuations
While there are a number of challenges facing HSBC and Shell, their current valuations appear to be unjustifiably low. Certainly, the low oil price is hurting Shell’s bottom line and the tax avoidance headlines are causing investor sentiment in HSBC to wane, but their current share prices appear to be too low even when these factors are taken into account.
For example, HSBC trades on a price to earnings (P/E) ratio of just 10.7, while Shell has a P/E ratio of just 10, both of which are significantly lower than the FTSE 100’s rating of 15.9. As such, both companies could be subject to an upward re-rating that would push the FTSE 100 past 7,000 points.
Potential Catalysts
Clearly, the share prices of HSBC and Shell will not move upwards on their own — there must be a catalyst to improve investor sentiment in order for this to take place. In Shell’s case, an improvement in the price of oil could go some way to being one, although this is an external factor over which Shell has very little (if any) control. As such, it is more likely that an improvement in news flow regarding its rationalisation plans will cause investor sentiment to pickup and send its share price higher.
With regards to HSBC, an improvement in the outlook for the Asian economy, as well as a conclusion to, or subsiding of, the recent tax avoidance claims, could be enough to improve market sentiment and boost its share price.
Income Potential
Of course, with the two companies offering yields of 5.9% (HSBC) and 5.6% (Shell) and the prospect of lower UK interest rates in response to a period of deflation, the catalyst behind share price increases for both stocks could be increased demand for high yielding shares.
Undoubtedly, both HSBC and Shell fall into this category and, with their both being relatively stable, well-diversified and financially sound businesses, their appeal as income stocks is significant and, ultimately, it is this that is perhaps most likely to see their share prices rise. As a result, this could be enough to enable the FTSE 100 to finally break through the 7,000 points barrier.