Could the FTSE 100 hit another record high in Q4?

A number of factors have driven the FTSE 100’s success: changing perceptions of UK investability; the positivity of the elections outweighs the uncertainty of the outcome; and, crucially, the buzz created by the return of mergers and acquisitions (M&A) to the market. Lower inflation, an initial rate cut in August and the perception of UK stocks as a safe haven amid two US tech corrections also helped.

All of this ended a decade of persistent underperformance.

Will the FTSE 100 hit another record high?

Today, the FTSE 100, currently at 8,282.56, is just a few percentage points away from May’s record high. Another big one could happen.

“Inflation and interest rates have come down since then and there are more rate cuts. GDP has also picked up since the start of the year,” says Michael Field, Europe market strategist at Morningstar.

“I’m not trying to paint a rosy picture that the UK is in amazing shape, but if you look at those three things together, it’s in better shape than it was in May. We could see record highs again.”

Other perspectives agree. Goldman Sachs analysts now expect the FTSE 100 to rise to 8,800 in the next 12 months. The FTSE 100 started 2024 at 7,721. Since then, it has seen an increase of almost 7%.

The German bank adds that low valuations and dividend yields are strong long-term contributors to the UK’s attractiveness, although its analysts also say the UK itself is hampered by a “lack of equity investment”. It should be emphasized again: London does not have a “Magnificent Seven” in the form of Nvidia NVDA, Tesla TSLA, Meta Platforms META, Apple AAPL, Amazon.com AMZN, Microsoft MSFT and Alphabet GOOGL.

However, some fund managers are confident. Andrew Raikes, portfolio manager of the Morningstar Gold-Rated TT UK Equity Income fund, also expects the FTSE 100 to hit new highs by the end of the year. Year to date, his fund has returned 9.67% to investors, outperforming the UK large-cap equity category by more than 1%.

“There is no doubt that there is substantial value for UK equities, including the FTSE 100, and we fully expect the UK indices to reach new highs over time. Whether this will happen before December, time will tell,” he says.

“Global equities have performed well and there are some potential risks to face in the near term, including the budget here in the UK at the end of October and the US election in November, which may not be directly relevant for fundamentals of much of the UK market, but which could be a source of volatility for global equities more broadly.”

Which companies will lead the FTSE 100 in Q4?

Given the volatility, it could be the consumer discretionary sector that pushes the FTSE 100 to that new high.

“The whole sector is (fairly undervalued) because people are moving away because they feel consumers don’t have a lot of money in their wallets,” Field says.

“But the positives are that interest rates, mortgage costs and the cost of living have come down and inflation has picked up a bit.

“For those who haven’t had a lot of money up until now, it should get easier in the coming months and next year, which means the valuations of those stocks should slowly start to rise as and when they see a rebound in sales”.

Here, it’s worth looking at Reckitt Benckiser RKT and Unilever ULVR in particular. Both are FTSE 100 companies. Both have suffered some pain this year. According to Morningstar data, last year Reckitt is down -15.60% while Unilever is up 32.42% respectively. Both also announced restructurings. Reckitt will divest its home care and baby formula brands, while Unilever will sell its entire ice cream division.

Reckitt is currently trading at £45.34, below the Morningstar estimate of £65, while Unilever shares are trading at £48.33, above the Morningstar fair value estimate of £43.80.

Field also supports housebuilders Taylor Whimpey TW. and Persimmon PSN, arguing that the low valuations each company faces will now be met with a significant increase as interest rates fall and the Labor government tries to improve housing affordability.

Michael Browne, chief investment officer at Martin Currie, agrees. He believes Labour’s budget on October 30 could have a substantial impact on the FTSE 100.

“By December, Britain will have had a good look at Labour’s new economic policy,” he says.

“To deliver its housebuilding programme, (Labour) needs housebuilders to build and for that it needs demand driven by lower rates.

“Produce a balanced budget that gets the Office for Budget Responsibility’s approval and there’s a real chance there’s a 50bps cut in November.”

As such, Browne is buying FTSE 100 stocks that could benefit Labour’s priorities.

“Taylor Wimpey for house building; National Grid (NG.) for electrification, which could lead to up to £120bn of investment in renewables and the grid over the next five years. Banks like falling rates because they can make more loans with fewer loans. losses, (so for that) NatWest (NWG) would be our choice,” he continues.

“Nobody knows what the consumer likes better than Next (NXT), so look forward to the outlook for wage and employment growth and don’t forget the unloved Sage (SGE) as the US and UK enter recovery. “

But not everything is positive. Browne also believes that Labor’s budget will hurt savings in the short term, which could lead to a pullback in markets in November.

“That budget could hurt savers because the government has ruled out changes to income tax and corporate tax,” he says.

“There is a real risk of savers lining their pockets (in other ways): changes to ISA allowances, capital gains tax, inheritance tax and business allowances would not encourage investors.”

For his part, Richard Marwood, head of income at Royal London Asset Management and lead manager of the Morningstar Gold-Rated Royal London UK Equity Income fund, says the market still has a lot to sort out before the end of the year. For the FTSE 100 to thrive, he feels “some of the big sectors—banks, oil, mining and pharmaceuticals”—it must also increase in the rest of the months of the year.

The future of the FTSE is not a domestic soap opera

Is it possible? After all, the FTSE 100 could still be hampered by declines in the names with the biggest market caps in the index itself. Pharmaceutical giant AstraZeneca AZN, which accounts for 9.29% of the index, returned 27.95% from January 1 to August 31, 2024, for example.

Morningstar Key Values ​​for AstraZeneca

• Economic ditch: Lat
• Estimated fair value: £124.00
• Term dividend yield: 2.02%
• Morningstar rating: 3 stars
• Sector: Health
• Morningstar Uncertainty Rating: Average

Oil giant Shell SHEL also accounts for 9.19% of the index. It returned 7.39% over the same time period. Last month, AstraZeneca became the only UK-listed company to achieve a £200bn valuation, even though a new drug it was making to improve the lives of breast cancer patients recently failed in trials. Shell is also in the midst of a cost-cutting drive, shedding a fifth of its workforce at two oil and gas exploration divisions.

Both companies need a good final quarter to drive the FTSE 100 higher.

For Nicolò Bragazza, associate portfolio manager at Morningstar Wealth, it is important for investors to remember that the domestic issues facing the UK economy will not make or break the FTSE 100 in the last three months of the year. Remember, he says, the FTSE 100 is a global index.

“One of the things that is catching a lot of people’s attention is that there is a lot of conversation about the impact of Brexit and certain developments in the UK,” he says.

“But the FTSE 100 is a collection of global companies that generate most of their revenue overseas. What happens in the UK is important, but not as important as you might think to the long-term fundamentals of these businesses.”