- AJ Bell FTSE 100 forecast for the end of 2024: 8,300
- Inflation, monetary policy and commodity prices are key variables
- Dividends, buybacks and takeovers should supplement any capital returns
- Prevailing gloom means UK equities look cheap on an earnings and yield basis
“After a gain of barely 3% in 2023, the FTSE 100 is no higher now than it was in early 2018, when Theresa May was prime minister and still trying to make the best of Brexit. But dividends, share buybacks and takeovers mean this year is not a total bust, even if investors will feel disappointed by the lack of overall capital returns,” says AJ Bell investment director Russ Mould. “However, a forecast 3.9% dividend yield and 2.7% cash yield from buybacks take the total return to nearer 10%, to beat inflation, gilt yields and cash in the bank. Those cash returns could prove helpful again in 2024 and it is possible to make the case for the UK’s premier stock market benchmark setting new peaks in 2024, despite political uncertainty ahead of the next general election, sticky inflation and low expectations for UK GDP growth.
“There can be no denying that the UK stock market has hardly covered itself in glory in 2023. Only Hong Kong and China have done worse, among major markets, and America’s NASDAQ, Japan’s Nikkei 225 and Germany’s DAX have left it far behind.
Source: LSEG Datastream data. *From 31 December 2022 to 14 December 2023, in local currency.
“No-one seems interested in the UK equity market, other than to bash it for failing to attract more new flotations and its inability to push on beyond the 8,000 threshold briefly reached in February.
“Such knocking copy persists, even though analysts think the FTSE 100’s aggregate pre-tax income in 2024 will exceed that of 2018 by 52% and that aggregate net, post-tax earnings will be 36% higher.
Source: Company accounts, Marketscreener, consensus analysts’ forecasts
“Corporate confidence also seems high, judging by how the FTSE 100’s members have announced a record £54.7 billion in share buybacks in 2023, to add to analysts’ forecasts of £78.7 billion in dividend payments. Combined, that makes for a cash yield on the FTSE 100 of 6.7% for 2023.
Source: Company accounts, Marketscreener, consensus analysts’ forecasts
“Even if there is no guarantee of a repeat in 2024, dividend cover is nicely above two times based on consensus analysts’ forecasts for earnings and dividends, and forecasts of a 4.2% dividend yield combined with a forward price/earnings ratio of barely 11 times may catch the eye of value-seekers.
Source: Company accounts, Marketscreener, consensus analysts’ forecasts
“Any trader or investor will tell you that mood follows price and prices are not doing much right now. As a result, UK stocks feel unloved and unloved can mean cheap. And buying cheap is the best possible way of getting good long-term returns. As the old saying goes, ‘you can have good news and cheap stocks, just not both at the same time.’
“All other things being equal, even an 8% advance in the FTSE 100 to 8,350 would leave the index on a PE of 12 and a yield of 3.9%, neither of which looks demanding.
“Granted, pre-tax earnings are not expected to grow just 3% in 2024 and dividends by 7.6%, but if interest rates fall as the markets expect – with four one-quarter points cuts from the Bank of England already pencilled in, despite governor Bailey’s protests to the contrary – then a modest re-rating could be justified.
“That said, there are more than enough variables to make second-guessing the markets even harder than usual. Geopolitical tensions continue to bubble in Eastern Europe, the Middle East and Asia; inflation is yet to be tamed; the Bank of England is still talking tough on monetary policy; GDP growth forecasts are modest; and the UK is getting ready for the next general election as the ruling Tory party remains beset with internal friction.
“Markets continue to put their faith in central banks and their ability to rein in inflation, engineer a soft landing for the global economy and maintain financial market stability. Hopes for a pivot in interest rate policy underpin the rally in stocks and bonds seen since early autumn, but there are inherent dangers in relying on the very same people who promised inflation would be transitory. Nor should it be forgotten that it is barely nine months since America suffered three of the four biggest bank failures in its history, and a major Swiss lender collapsed into the arms of a bitter rival.
“If central bankers can be potentially wrong on, well, anything, then stock market strategists and asset allocators can be forgiven for hiding behind Lao Tzu’s assertion that: ‘Those who have knowledge don’t predict; those who predict, don’t have knowledge.’
“It is also possible to argue that the UK stock market is cheap because it deserves to be, given the FTSE 100’s heavy weightings toward the unpredictable (oils and miners), the indigestible (banks and insurers) and the beyond-the-pale, at least so far as ESG screens are concerned (tobacco, oils, miners, bookmakers and defence stocks).
“Yet the valuation is tempting and certain sectors – banks, miners, housebuilders – already look to be pricing in a downturn in earnings and a recession, looking at their valuations and analysts’ predictions for the trajectory of their earnings. Yes, aggregate earnings forecasts for earnings and dividends in 2024 could be too high, especially if a recession does finally happen, but the market seems to be ahead of analysts in terms of pricing that in.
“Moreover, the two-year gilt yield, which traditionally moves six to nine months before the Bank of England, stands at 4.30%, to again effectively price in four interest rate cuts.
Source: Company accounts, Marketscreener, consensus analysts’ forecasts
“A recession may not be the surprise many think it to be, at least from a share price perspective, and if we get an alternative outcome – such as stagflation, inflation and stickier-than-expected interest rates – the UK equity market’s charms may become more apparent. This could indeed be the lesson from 2022 when the FTSE 100 hung in there.
“There may even be potential for upside to earnings estimates, especially as the slant of earnings towards oils, miners and banks means the FTSE 100 may be one of the indices that is better suited to an inflationary or stagflationary out-turn.
Source: Marketscreener, consensus analysts’ forecasts
“That would contrast with markets like the USA, which is packed with tech, social media, internet and biotech stocks that offer the prospect of long-term earnings growth from the starting point of high valuation multiples. The package remains one of jam tomorrow at high prices, a combination which proved ill-suited to 2022’s environment – an environment which investors believe to be an aberration rather than the new normal.
“Equities’ rally in 2023 has undone much of commodities’ relative outperformance in 2021 and 2022, as investors have kept faith in central banks and their ability to defeat inflation, stave off a recession and preserve financial market stability.
“But should inflation – or stagflation – prevail, commodities and ‘real’ assets may yet exert a stronger pull than ‘paper’ ones. Although commodities have outperformed for the last two years, their relative strength compared to equities is nowhere near as great as it was during 2008-10, when faith in paper assets and central banks was also at a low ebb.”
Source: LSEG Datastream data
