The FTSE 100 had a respectable 2021 as it increased by over 14% to 7,385 points. However, this is still lower than where it was before Covid hit at the start of 2020. It’s important to have a view on the FTSE 100 if I’m going to use an index tracker in my portfolio like the iShares Core FTSE 100 ETF (LSE: ISF). It may also help me with my stock selection.
With this in mind, here’s my view on the FTSE 100 for 2022.
Top sectors in the FTSE 100
I like to break down a stock market index into its constituent sectors. This allows me to understand the growth prospects in a bit more detail. Understanding the sector composition also helps to explain why the FTSE 100 increased by 14% last year, but the US equivalent index, the S&P 500, surged by 27%.
The reason is that the FTSE 100 is dominated by ‘old economy’ sectors, such as financials, energy and basic materials. Companies such as BHP, HSBC and Royal Dutch Shell all achieved respectable double-digit share price returns in 2021. Such businesses generally grow in line with the wider economy. They have benefited from the rebound in economic growth after the pandemic-induced recession.
By comparison, the S&P 500 includes technology and consumer discretionary stocks such as Apple, Microsoft and Tesla. These companies are driven by technological innovation, and may therefore grow at a far higher rate than an underlying economy. For example, Tesla stock rallied a huge 50% last year, and the Microsoft share price surged 51%.
My bull thesis
With my knowledge of the sectors most represented in the FTSE 100, this is what I think will happen to them this year.
Regarding financial stocks, I think this sector will perform well in the year ahead. This is because of the prospect of rising interest rates that should increase profit margins. The Bank of England has already increased the base rate in December, and I see future rate hikes ahead to combat higher inflation.
And although energy and basic materials stocks may be seen as ‘old economy’, these businesses are going to be crucial in decarbonisation and electrification efforts. For example, mining companies produce essential minerals that are needed in advanced electric vehicle batteries. Energy companies (such as Royal Dutch Shell) are collectively investing billions into renewable energy sources too.
Risks ahead
Where my bull thesis might fail is if we get another more deadly strain of Covid. Omicron is already causing disruption, with countries entering lockdown again. Sectors such as energy and basic materials really suffered during the initial pandemic, so there’s a risk of a repeat in 2022.
Furthermore, although the prospect of rising interest rates may increase banks’ profitability, it may slow overall economic growth.
My final assessment
Overall, I’m bullish on the FTSE 100 for 2022. I’m expecting another year of around a 10% return. This would mean the points value breaching 8,000 for the first time. In support of this, I think the UK economy will continue to expand and recover from the pandemic. I also have a favourable view on the ‘old economy’ sectors.
This is not without risk, but I’m going to carry on holding my FTSE 100 stocks into 2022.