July’s been a poor month for the FTSE 100. The index fell below 6,000 for the first time since 22 May at its close on Thursday. It also closed at the lowest since mid-May or in two-and-a-half months. There’s more. After two straight months of gains, the index average in July fell by 1%.
Poor performances drag down FTSE 100
There’s a bunch of reasons for the latest tumble, the first of which is a poor set of financial results by FTSE 100 heavyweights like Lloyds Bank and Royal Dutch Shell, which both posted a sharp contraction in income. In LLOY’s case, there’s actually a pre-tax loss. Moreover, banks like HSBC and Standard Chartered find themselves caught in the US-China trade tensions as the second cold war gets more real by the day. News from the global economy wasn’t exactly encouraging either. The US economy shrank the most on record and the German economy contracted too, pulling world indexes down as well.
Investing in the ‘new normal’
I wish I could say otherwise, but I doubt if this situation will be resolved soon. In other words, I think investors are looking at a rapidly evolving ‘new normal’ in which to navigate their stock market decisions. What makes this the ‘new normal’? One, the pandemic has been controlled to an extent but, until such time as there’s a vaccine or cure for Covid-19, fluctuations in the markets can be expected. Two, the economic aftermath of the pandemic is yet to play out. I think that economic weakness will continue well into 2021, which will also create uncertainty in the FTSE 100 index. Third, continued tensions between the US and China on the one hand and Brexit uncertainty on the other will also keep the index in a range.
Where I would invest £1,000
However, I don’t think what’s true for the broader index is necessarily so for all its constituents. Many FTSE 100 companies continue to be high performers even during this time. Consider pharmaceutical companies like AstraZeneca and Hikma Pharmaceuticals, which were gainers at Thursday’s close. It’s not a coincidence. They are financially healthy companies with good prospects. The pest control and hygiene services provider Rentokil Initial was another gainer, for the same reasons.
One reason investors could be hesitant to buy these stocks is that their prices have already run up quite a bit already. Going by the price-to-earnings (P/E) ratio, AZN is quite expensive. RTO too, isn’t among the most price-competitive stocks. However, others like HIK are relatively cheap, with a P/E of 11 times.
I think it’s also a good time to dip a toe back in cyclicals. Correction in some sectors has been quite dramatic, and because of this, I think they can make gains even in an otherwise indifferent environment. I like companies such as Persimmon and Barratt Developments, which have suffered along with the rest of the property segment. I think FTSE 250 companies like Marshalls and Bellway are also ones to consider for investing £1,000 in an ISA.