I believe the FTSE 100 index could take off in 2021. I expect the index’s performance to improve after a lacklustre 2020 as the economy turns a corner.
The FTSE 100 is mainly made up of resource and financial firms. This positioning has weighed on the index for the past decade or so. In the years after the financial crisis, some of the index’s most prominent constituents, such as Lloyds and NatWest (formally RBS), faced lengthy restructuring programmes. For NatWest, the programme is still ongoing, as the UK government remains the lender’s biggest shareholder.
And while the financial sector dealt with its problems, resource companies faced their own challenges. The prices of key commodities increased in the first half of the last decade, but the boom times didn’t last long.
Unfortunately, many mining companies had staked billions on the commodity boom continuing. When prices collapsed, they had to write off billions of pounds worth of investments. It took the industry years to recover from these issues.
The oil sector is still recovering. After facing an oil price crash in 2014, the industry suffered another gut-punch in 2020 when the pandemic sent oil prices plunging. As a result of these challenges, Royal Dutch Shell and BP ended up reporting some of the most considerable losses in UK corporate history for 2020.
However, it’s beginning to look as if the outlooks for these sectors are improving. The oil price has recovered to pre-pandemic levels recently, while the prices of essential commodities, such as iron ore and copper, have also increased to multi-year highs. Rising iron ore prices allowed Rio Tinto and BHP, two of the largest companies in the FTSE 100 index, to announce record dividend payouts earlier this year.
The prospects for the financial sector is improving as well. The pandemic hasn’t impacted UK banks as severely as initially expected. Based on their improving outlooks, regulators have allowed them to reintroduce dividend payouts.
Based on all of the above, I think the FTSE 100 index could take off in 2021.
With the outlooks for the oil and gas, mining and financial sectors improving, the share prices of these companies could increase in 2021, which would push the UK’s leading blue-chip index higher.
Unfortunately, this is by no means guaranteed. The commodities sector can be incredibly volatile, as we’ve seen over the past 12 months. Also, these sectors only account for around a third of the index’s 100 constituents.
For the FTSE 100 to move substantially higher, other stocks will have to put in a positive performance as well. There’s no certainty this will happen as other companies, such as British American Tobacco, face a more uncertain future.
The prospects for the industrial sector will also depend on how quickly the UK economy recovers from the pandemic. The index also lacks exposure to the fast-growing tech sector, which could impact long-term returns.
Overall, I’d buy the FTSE 100 index for my portfolio in 2021, based on its improving outlook. However, I’d include other investments alongside the blue-chip index to provide diversification and non-UK exposure due to the risks outlined above.
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Rupert Hargreaves owns shares in British American Tobacco. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.