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Last Friday (17 January), the FTSE 100 index closed at a new all-time high, beating the record set last May. At 8,505 points, it’s gained over 400 points in just the past month.
Yet some might be confused, given the bleak economic outlook and the potential for higher inflation. So I weighed up what the best course of action could be.
The case for buying
Late last year, I wrote about how the FTSE 100 was very undervalued by comparison to the S&P 500. In fact, the average price-to-earnings (P/E) ratio for the UK stock market at that point was half that of the US. Therefore, it doesn’t surprise me that much that UK stocks are doing well to start the year. For value investors, I imagine some have booked some profits on US shares and used that money to invest in the UK at better valuations.
Even with the push to record highs last week, the average P/E ratio for the index is 15.5x. Even though this isn’t what I’d call undervalued, it’s still lower than the US and some other developed markets. So from that angle, there could be further scope for FTSE 100 stocks to keep rallying in the months to come.
Targeting specific sectors
Investors should remember that they don’t have to simply buy a FTSE 100 index tracker. Rather, they can be selective in the sectors to target. For example, on Friday a host of the top performers were from the commodity space. So an investor could look to buy a stock from this sector for further potential gains.
Anglo American (LSE:AAL) jumped 3.6% on Friday and is up 46% over the last year. The business is involved in the exploration and processing of a wide range of metals and minerals. This includes diamonds, copper, iron ore and coal. As a result, even though the share price is influenced by commodity prices, it’s diversified enough not to be incredibly volatile due to a swing in the raw material price.
Commodity prices have started 2025 off well, with some forecasting a strong year ahead. If the Chinese manufacturing sector picks up, demand for iron ore and coal will increase. Copper’s continuing to experience higher demand due to the wide range of commercial uses. Anglo American could benefit from these factors, causing the share price to rise.
A risk is that the firm operates in some politically unstable areas, such as South Africa and South America. Changes in regulation or operational activities can be common, threatening to disrupt production.
Broader caution
I do understand that as humans we struggle to justify buying something when the price is high. Not only this, there are valid concerns that the UK economy could underperform this year if interest rates don’t fall that much and inflation picks up again.
Yet that’s why I think investors can find selective pockets of opportunity in the index. Anglo American’s a company well worth considering alongside other commodity sector ideas.
