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Will inflation, oil and travel send the FTSE 100 to a record high?

At 7,460 points right now, the FTSE 100 is 5.3% below its all-time high of 7,877 it struck in May 2018. And its oil, banking, travel and tech stocks could help set a new record in 2022.

ftse 100 Source: Bloomberg

Some analysts are expecting the FTSE 100 to enter permanent correction territory this year, pointing to significant volatility over the past few weeks. The blue-chip index rose from 7,385 at the start of the month to 7,611 points by 17 January, before falling to 7,297 a week later.

But at 7,460 points right now, the FTSE 100 is above pre-covid-19 pandemic levels, up 14.7% over the past year, and 75 points higher than it was at the end of 2021. And it could strike a record high in 2022.

FTSE 100: oil and bank stocks

The world is undergoing a transition to green energy. FTSE 100 oil stocks BP and Shell both know this, and are investing heavily in renewable technologies. But roughly 80% of the world’s energy needs are still met with fossil fuels. And as the global economy reopens, Brent Crude has hit $91 per barrel, its highest price since 2014. Goldman Sachs believes this could soon reach $100, while Jeffries analyst Christopher Wood believes oil could go ‘significantly higher,’ to as much as $150 a barrel ‘in a world that really reopens.’

This price pressure is likely to be sustained by geopolitical tensions at the Russia-Ukraine border. US President Jo Biden thinks there is a ‘distinct possibility’ that Russia will invade its neighbour next month and has promised to block the opening of Russia’s Nord Stream 2 pipeline into Germany if the invasion goes ahead.

Meanwhile, with Consumer Prices Index inflation at 5.4%, the Bank of England is expected to double the bank rate from its current 0.25% to 0.5% in March. This will be the first time the UK’s central bank has issued two consecutive rises since 2004. And according to Paul Dales, Chief Economist at Capital Economics, ‘the leap in inflation will prompt the Bank of England to raise interest rates further this year than most economists anticipate, from 0.25% to 1.25%,’ with further raises possible in 2023. FTSE 100 banks HSBC, Barclays, Lloyds, and NatWest could all soar on the back of increased profitability on mortgages and loans.

ftse 100 2 Source: Bloomberg

FTSE 100: travel and tech stocks

Rolls-Royce, which designs and manufactures aircraft engines, and IAG, parent of British Airways and Iberia, have both have been hit hard by pandemic era travel restrictions.

But in England, face masks and covid passes are no longer legally required, while work from home guidance has been lifted. With cases falling rapidly, Health Secretary Sajid Javid has announced ‘Omicron is in retreat.’ Moreover, transatlantic routes to North America have now reopened. And IAG owns the London Heathrow—New York JFK airline route, the most profitable in the world. Based on its most recent results, passenger numbers could rise to pre-pandemic levels during the peak summer season.

And Rolls-Royce could also soar as demand for its aircraft engines begins to lift off. The company is also building cost-effective mini nuclear reactors in the UK, which are likely to see increased interest as oil and gas prices continue to rise. Of course, both are vulnerable to inflation and rising fuel prices, which can hit demand and profit margins.

The FTSE 100 also boasts two tech stocks that could see some price recovery soon. At 1,003p, Scottish Mortgage Investment Trust has lost more than a third of its value since early November, as the prospect of near-term interest rate rises hammer its tech holdings. But the trust has raised £294 million as ‘competition for capital in the Scottish Mortgage portfolio is intense.’ With its uncanny ability to invest successfully in disruptive companies such as Spotify or Wise years before they go public, it’s trading at a Net Asset Value of 1.4%. This could indicate high demand from investors who might be smelling an overcorrection.

Meanwhile, once-loved Ocado is down almost 50% from its high in February 2021 to 1,452p today. But it’s now developed robots that could reduce staffing needs by up to 80% in the long term. CEO Tim Steiner believes the tech is a ‘game changer…that could ‘shatter the existing rules of the industry.’ It could be that wider fears of tightening monetary policy are masking the success of true technological breakthroughs. And as money becomes rarer, investors may flock to Ocado’s concrete advances over the more ethereal ambitions of its technological competitors.

With oil, banks, travel and tech, the FTSE 100 could set a new record in 2022.

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*Based on revenue excluding FX (published financial statements, June 2020).

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