Where now for the FTSE 100?
The FTSE 100’s huge rebound from the October low has helped to revive interest in the index, and an improving outlook for some of its big sectors could aid in a continued recovery.
FTSE 100 recovery gathers pace
The recovery in the FTSE 100 has been remarkable. An index that had spent all summer moving in a downward direction from its June high has managed to recoup months of losses in the space of about three weeks.
The vaccine news has been the catalyst. The potential for an earlier than expected reopening of the global economy has given new life to several key sectors with big weightings, which has been enough to drive the overall index to its highest level in six months.
But is this a flash in the pan, a brief moment of glory for an index that lacks the glamour of big tech stocks, while being weighed down by underperforming banks and oil companies facing a quantum shift in their industry?
Base metals to boost mining stocks
If there is to be a big recovery in the long-term, it needs to come from the heavyweight sectors. Of these, the third-biggest is the mining sector, around 12% of the index. Base metals have had a strong year overall, even considering the Covid-19 sell-off, and with a vaccine now much closer than previously thought it appears that we will see demand for metals recover as industry reopens and businesses look to expand once more.
A key component of this will be China, which has already imported a record 5.6 million tonnes so far this year, with more to come for the November and December figures.
Oil prices rallying after tough summer
The ‘reopening economy’ narrative is good for oil too, and at 10% of the index it will help drag the FTSE 100 higher too. Oil consumption should rebound as economies move to a more ‘normal’ footing.
With OPEC also looking to keep a lid on production levels and foster agreement among its members we could see further gains in oil. Even the election of Joe Biden as president points towards a better period for the black commodity – his antipathy towards fracking could help restrict US shale output and provide another positive tailwind for oil prices.
Consumer staples to benefit from global recovery in spending
Outside of the two sectors mentioned above, we can expect further strength from the consumer staples sector, a whopping 18% of the index. Names like Diageo, Reckitt Benckiser and Unilever should benefit from the consumer spending more, while even UK supermarkets could feel the benefit as UK shoppers increase their basket sizes as the economy recovers.
Particular faith should be placed in Diageo, which looks finally to have snapped a year-long downtrend from the 2019 highs, and returns to its winning ways as one of the FTSE 100’s most consistent performers.
Banks a potential drag
It isn’t all good news. The financial sector is almost a fifth of the index, the second biggest after consumer staples. Brexit and a low interest rate environment are the twin demons here, the former clouding the outlook and the latter hitting profitability.
But perhaps even here there is hope – if consumer spending and the employment market can recover then mortgage lending may pick up, while a Brexit deal that preserves the UK financial sector’s links to Europe offer the chance of improved profitability. UK banks have not been a great place to be for a while now, but hopes of a rebound could support NatWest, Lloyds and Barclays.
FTSE 100 – technical analysis
The Covid-19 sell-off drove the index its lowest levels since 2011. But hardy buyers stepped in below 5000 and allowed the index to recover the 5500 level, which was also the low during the 2015 China-related selloff.
The next few months saw this level defended again, and with this monthly base in place perhaps a move back to 7000 can be contemplated. If there is a broader shift from growth to value underway, then the sectors outlined above, plus others like airlines and engineering firms, should help lead the way higher.
The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.
Act on share opportunities today
Go long or short on thousands of international stocks with CFDs.
- Get full exposure for a comparatively small deposit
- Trade on spreads from just 0.1%
- Get greater order book visibility with direct market access
See opportunity on a stock?
Try a risk-free trade in your demo account, and see whether you’re on to something.
- Log in to your demo
- Take your position
- See whether your hunch pays off
See opportunity on a stock?
Don’t miss your chance – upgrade to a live account to take advantage.
- Trade a huge range of popular stocks
- Analyse and deal seamlessly on fast, intuitive charts
- See and react to breaking news in-platform
See opportunity on a stock?
Don’t miss your chance. Log in to take your position.
Live prices on most popular markets
You might be interested in…
Find out what charges your trades could incur with our transparent fee structure.
Discover why so many clients choose us, and what makes us a world-leading provider of CFDs.
Stay on top of upcoming market-moving events with our customisable economic calendar.