Over the last month, the FTSE 100 has climbed an impressive 6%. I say impressive because this has been a dark time for the UK economy.
It seems counterintuitive that the UK’s index of top blue-chip stocks should be heading upwards, while everything else is pointing south. I can see several reasons for this.
The first is that investors are forward-looking. While shoppers are examining their wallets and wondering why they are feeling so poor today, investors are looking about nine months ahead. Will we all be feeling better off come the summer? Will company earnings have bottomed out? Will the recovery have started?
FTSE 100 is back above 7,400
Those are the questions they are asking and many have clearly decided that the FTSE 100 has been oversold in recent weeks.
Another, very different, reason the FTSE 100 is doing well is that companies listed on the index generate three quarters of their earnings overseas. They actually benefit from a weak UK economy, as it knocks the pound. This boosts the value of their overseas earnings when converted into sterling. Bad news for the UK is often good news for the lead index.
Also, the index does not exist in a vacuum but is affected by sentiment elsewhere. The S&P 500 has also recovered in the last month. It is up 4.02% as investors calculate that in nine months’ time the US Federal Reserve will be more dovish than it is today.
They were encouraged by October’s inflation figure, which showed consumer price growth slowing to 7.7%. That’s the smallest 12-month increase since January. Investors hoped this would allow the Fed to slow the pace of rate hikes. Now they’re not so sure and the S&P 500 is sliding.
Second-guessing the stock market is impossible, and it doesn’t get simpler when looking nine months into the future. I haven’t been blessed with an investment crystal ball and have no idea where the FTSE 100 is going. I only know where it has been.
Over the last five years, the answer is pretty much nowhere. It is up just 0.33% in that time.
I’ve just bought these two stocks
That is less of an issue for me, because I do not buy funds tracking the FTSE 100. Instead, I prefer to buy individual stocks. This gives me much greater scope to pick up bargains, and beat the broader index.
Right now, a number of companies have had a rough ride, and look good value as a result. In recent weeks, I have bought Persimmon and Rolls-Royce. Respectively, these stocks are down 51.64% and 72.26% over five years.
That does not make them automatic bargains, of course. Both stocks could fall further before they recover, with Persimmon particularly vulnerable as house prices slide. By purchasing them after they have sold off, I reduce the chance of overpaying.
I further boost my chances by aiming to hold them for a minimum 10 years. Over such a lengthy period, I believe my FTSE 100 stock picks will be worth far more than they are today. So the sooner I buy them, the better.
