The FTSE 100 finished Thursday at 7,255 points. It’s gained almost 1,000 points over the past year, as the UK economy has recovered from the pandemic. In theory, if the performance was replicated over the next year, the index would exceed 8,000 points for the first time. Although that barrier seems far away, here are a few reasons why I don’t think it’s an unreasonable expectation.
A continued economic recovery
Over the past few months, encouraging data out of the UK has been one driver supporting the FTSE 100. For example, the unemployment rate has fallen from 5.1% at the start of the year to 4.3%. If I look at inflation, it has risen from 1.4% in January to 4.2% in the latest release.
The metrics show that economic activity is increasing, and prices are rising. If this spills over into higher GDP growth rates, it should support the stock market to head higher. Buoyed by more activity and higher spending, a host of sectors should see revenue increases.
Even if we see the Bank of England raise interest rates in order to stem rising inflation, I think the market will be able to survive the short-term road bump.Â
Big players could drive the FTSE 100
Another reason for looking towards 8,000 points next year is due to the constituents driving the index. The FTSE 100 is a market-capitalisation-weighted index. This means that the companies with the largest market cap provide the largest impact on the overall index.
When I look at the top five companies, I can see upside ahead. Pharmaceutical firms AstraZeneca and GlaxoSmithKline should see continued demand related to Covid-19-related products, but also more broadly with the ageing world population.
HSBC as a global bank should benefit from the higher interest rates both in the UK and the US, as it can boost net interest income. Although I don’t see any massive moves higher for Unilever and Diageo, I don’t see any reason for a material crash either.
Obviously, it’s going to take more than just these companies to drive the FTSE 100 higher, but it’s certainly a good start to be positive on the largest players in the index.
A home for excess cash
The final reason I think the FTSE 100 could do well next year is due to a lack of viable investment alternatives. Even with interest rate hikes, my cash balances are likely to still give me a negative return after taking into account inflation. This is at a personal level, but the same principle applies to large pension and hedge funds too.
These institutional money managers are trying to find a home for cash, and right now the stock market is one of the few places to be able to try and generate a return. I think this could continue into 2022.
My view here could be wrong, with some risks worth noting. The big one is Covid-19, and a resurgence in variants. Another risk is that we see a renewed slowdown in China, which has a knock-on impact on the UK.
I personally think that 8,000 isn’t an unrealistic target for the FTSE 100 next year, so will continue to invest in the market.