The FTSE 100 is up over 8% this year, and has almost recovered from the pandemic-induced mini-crash of March 2020. However, the Omicron variant is causing uncertainty over the index's direction next year.
On 11 November, the entire FTSE 100 was worth 7,384 points, up 12.3% since the start of the year. But over the past month, the index has slipped to 7,122 points, as fears over the Omicron variant and potential interest rate rises have hit investors' nerves.
Last year, the FTSE 100 collapsed 30% in the space of a month, from 7,404 points on 21 February, to 5,191 points on 20 March. Having now recovered much of this ground, investors now want to know where the index will go heading into an uncertain 2022.
Some investors will continue to follow a FTSE 100 tracker fund. Warren Buffet is a great proponent of index investing, saying in this year’s Berkshire Hathaway meeting that ‘here’s a great argument for index funds.’ And plenty of investors who pick individual stocks do worse than the index average.
But the situation right now is special. Either the Omicron variant sends the UK back into a healthcare crisis, or the economic recovery continues apace. And the outlook for individual FTSE 100 stocks is very different in these two scenarios, which is likely to tempt investors to try to beat the market.
Of course, having risen so quickly over the past year, the index may simply reverse to the mean. 2022 could even be a year of relative stability.
FTSE 100 boom stocks
Travel stocks Rolls-Royce and IAG (British Airways and Iberia owner) are two strong candidates to boom if the economic recovery strengthens. At 132p, IAG is 71% below its pre-pandemic share price of 457p it was worth on 17 January 2020, while Rolls-Royce at 125p, is 89% below its 5-year high of 1,088p. And IAG is expecting a €3 billion loss this year, while Rolls-Royce is continuing with a £2 billion disposal program. Meanwhile, the Business Travel Association has described the requirement for expensive pre-departure PCR testing as a ‘hammer blow’ to the industry. But if restrictions are loosened soon, pent up demand for international travel could see both rocket in the new year.
Lloyds could also boom if the economic recovery strengthens. It recently posted a £2 billion Q3 profit, almost double compared to the same quarter last year. A continued recovery should come with increased inflation, so the Bank of England will be more likely to raise the base interest rate. As the UK’s largest mortgage lender, its profits would soar on increased mortgage payments. And a rate rise would increase its profits more sharply than its competitors, as it has no international operations.
Of course, rates may take some time to rise. MPC member Michael Saunders said on Friday that there are ‘particular advantages in waiting to see more evidence on (Omicron’s) possible effects on public health outcomes and hence on the economy… continued delay also could be costly.’
The fates of both Persimmon and Rightmove are also tied to the housing market. Persimmon delivered 10% more completions in 2021 than in 2020 and is currently paying out an 8.9% dividend yield. With the housing market red-hot, a small interest rate rise is unlikely to dent demand for the housebuilder’s property. Rightmove is the UK’s largest property portal and has extremely low operating costs due to its online nature. And at 738p, it’s up 18.8% in the past year.
Hospitality stocks Compass Group, Whitbread, and Diageo are also stocks to watch. All three are significantly below their pre-pandemic highs, as demand for hotels, catering and alcohol is tied up with consumer confidence. But if the UK turns a corner over the winter, a hospitality resurgence becomes likely.
Then there’s oil stocks BP and Shell. Both are recording record profits as the price of oil and gas continues to hit multi-year highs. For climate-conscious investors, they’re also investing heavily in green energy. Brent Crude is predicted to rise even further in 2022, which will deliver even more profits for shareholders — but oil prices can be unpredictable, in 2020, even hitting negative territory, as demand slumped in lockdown. And this could happen again
FTSE 100 defensive stocks
Of course, there’s a pessimistic possibility that the pandemic is about to get worse. If the Omicron variant can evade the protection afforded by the vaccine roll-out to a sufficient degree, then very different FTSE 100 sectors will benefit.
Healthcare stocks Reckitt Benckiser and AstraZeneca are two good examples. Reckitt Benckiser’s share price is up 2.5% in the past month, as demand for its Nurofen and Strepsils brands rises over the winter. Meanwhile, as the manufacturer of the UK’s home-grown vaccine effort, AstraZeneca’s share price would likely rise on international orders of vaccine booster jabs.
Tesco is also a stock to watch if the pandemic surges. At 280p, its share price has soared 30% since March. And with a 27% market share, it’s the UK’s grocery market leader. The lockdown era saw its online offering soar, and a return to lockdowns could see revenues rise strongly again. Moreover, the supermarket giant is also a potential private equity buyout target after Morrisons was snapped up earlier this year.
Vodafone and BT are also stocks to watch in a downturn. Vodafone is already seeking to profit from the EU’s €750 billion recovery fund and is seeing strong growth of its M-PESA Fintech venture in Africa. Meanwhile, BT has just signed on experienced new Chairman Adam Crozier, and the reintroduction of dividends and expansion of its Openreach network could both send the stock higher next year.
Mining stocks have also historically done well during economic downturns. While the likes of Rio Tinto, Evraz, and Anglo American might all be smart choices, one to watch is Glencore, due to having one foot in oil and the other in the mining industry. Gold and silver miner Polymetal International is also a stock to watch. While its share price is down 26% year-to-date, this is largely down to the falling gold spot price. In recessions, demand for gold and silver rises, and Polymetal’s share price could rise with it. Of course, if the economy rebounds, demand for precious metals will continue to fall.
Finally, British American Tobacco is also a popular choice as a defensive stock. It’s been one of the highest yielding stocks on the FTSE 100 for years, as the addictive nature of nicotine means that demand for its products stays stable regardless of the economic situation. While tobacco use is falling globally, it owns six out of 10 most valuable tobacco brands. Of course, there’s an ethical factor when it comes to investing, and some may be uncomfortable including the stock in their portfolios.
Whether there’s a boom, a crash, or a period of calm in 2022, there will be winners and losers. Omicron or another variable could blow the FTSE 100 off course in 2022. Or the recovery could strengthen significantly. But wherever clients decide to put their money, there’s plenty of choices at IG.
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*Based on revenue excluding FX (published financial statements, June 2020).
Charles Archer | Financial Writer, London
06 December 2021