At the start of 2022, the FTSE 100 looked like it was set for a cracking year. After underperforming rival markets for ages, suddenly the stars were aligned in its favour.
US tech giants such as Amazon, Facebook and Tesla were starting to look seriously overvalued, while rocketing inflation looked set to slash the value of their future earnings in real terms. They also faced regulatory threats.
Suddenly, ‘growth’ stocks were out and ‘value’ investing was back in fashion. That was good news for the FTSE 100, which is full of value stocks. These are companies with solid earnings and reliable dividends, that have been overlooked by investors and are therefore trading at attractive valuations.
The FTSE 100 hasn’t crashed yet
Money flooded into FTSE 100 oil explorers, mining companies, banks and pharmaceuticals, as global investors woke up to the opportunity.
Then Russian tanks and troops poured into Ukraine, and the great FTSE 100 recovery of 2022 was stopped in its tracks. It crashed below 7,000 in March, as investors wondered whether we really were facing World War 3, with Russia making nuclear threats.
Yet a strange thing has happened in recent days. Investor sentiment has picked up. The FTSE 100 recovered. It jumped another 0.46% yesterday, to close at 7,476.72. That’s a tiny drop of just 29 points year-to-date, from its starting point of 7,505.15.
The UK lead index isn’t doing too badly after all. By comparison, the US S&P 500 is down almost 6% year to date. One reason is that the oil price has shot up, and this has boosted BP and Shell. The index is also rich with commodity stocks such as BHP Group and Rio Tinto, which are seen as inflation hedges as raw material prices rocket.
Central bankers are turning hawkish. The US Federal Reserve has hiked its funds rate once and is expected to hike again, by 0.5%, next month. The Bank of England has now hiked base rates three times in a row and this will allow FTSE 100 banks such as Barclays and Lloyds Banking Group to widen their net interest margins, the difference between what they pay savers and charge borrowers.
We are already seeing this happen, as banks raise mortgage rates in line base rate rises, yet hold easy access savings rates at just 0.01%. That’s bad news for bank customers, good news for investors.
Value is back in fashion
Another reason the FTSE 100 is in recovery mode is that investors are behaving a bit strangely, in my view. They are shrugging off the many negatives out there right now, and feasting on the few positives. They are lapping up rumours of Russia-Ukraine peace talks, even though any resolution seems far off to me.
Talk of a Chinese government stimulus also had them in a lather. Are they worried about thermonuclear war? Not so much.
The truth is I have no idea whether the FTSE 100 will recover this year. Nobody does. There are too many variables for even a super-computer to make that call.
What I do know is that I will continue to buy top UK shares. History shows they are still the best way of building long-term wealth, whatever the geopolitical climate.