A look-ahead to the stock market’s upcoming six months, naturally maintaining a long-term investing viewpoint!
The disparity between those most and least affected by high-interest rates, in our opinion, will define H2. It is obvious that the Bank of England will maintain raising interest rates during the next six months.
Some stock market losers result from this, including businesses involved in real estate. The demand for houses will decline as a result of rising mortgage rates since customers cannot afford to become first-time buyers.
However, we think that investors will be eager to buy stocks with little to no debt. This means that the company isn’t at risk of having to issue further debt or take out loans with exorbitant interest rates. Low-interest costs should lead to higher profits as a result.
Finally, there are several issues where we’re still undecided. Making more of a net interest margin should be advantageous for banking stocks. However, if retail customers begin making loan defaults, it can have a negative effect on the profit and loss account as a whole.
Bearishness to persist before the recovery
The stock market’s success in the first half of 2023 has been mostly determined by how rapidly global inflation continues to decline and central banks’ resolve to tame uncontrollable price increases. Throughout the second half and possibly beyond, the direction of share market prices will most likely continue to be determined by these two issues.
The inflation in the UK has so far outperformed expectations, and interest rate projections have been steadily rising. The peak rate predicted by economists for next spring has increased from their initial estimate of 4% to 6.5%.
Investor confidence is also being impacted by worries about rising US inflation. Last week’s positive employment market figures imply that the Federal Reserve, like the Bank of England, may keep hiking interest rates for a longer period of time. The likelihood of a global recession is extremely real in this environment.
Since the beginning of 2023, the FTSE 100 and FTSE 250 have declined by 3% and 23%, respectively. Although we are convinced that stock markets will eventually rebound, key economic data indicates that there may be more suffering in the months to come.
Prior macroeconomic and geopolitical crises have always been followed by a recovery in global share market prices. But keep in mind that previous rallies may not be reproduced.
FTSE 100 prediction
The FTSE 100’s performance by year’s end will rely on how swiftly inflation declines. A strong Pound will be one of the main catalysts required to dispel the challenges UK companies are currently facing.
In addition, a greater rebound in the Chinese economy will be required to support an increase in commodity prices. Given the significant weight placed on commodities, industrials, and financials in the index, this would be essential to promoting inflows back into FTSE 100 equities.
Cooler-than-anticipated inflation readings could help the FTSE 100 recover from its current decline. And since the FTSE 100 is already trading at a P/E of 9, further declines are improbable because value investors will come in to support the already-low valuations of UK firms. However, it’s important to keep in mind that any rebound might be severely hampered if geopolitical tensions continue to rise.
Two stocks to perform well in H2
Platform fees, fund management fees, earnings on cash balances, and other services are the main sources of income for Hargreaves Lansdown.
As interest in investing increased among retail investors during the epidemic, who presumably had more time and money on their hands, it was among the best-performing UK companies.
But since then, this aspect of the business has slowed considerably. Despite maybe being more resilient than many anticipated given the cost-of-living problem, H2 may put this resilience to the test.
Why are we hence optimistic about Hargreaves Lansdown? In any case, the Bristol company earns money from customer deposits primarily by charging interest on these cash holdings.
Customers who have cash in their accounts with Hargreaves Lansdown may request that the company invest it in interest-bearing securities like money market funds or short-term government bonds.
Hargreaves is in a good position to profit from the Bank of England rate rising to 7% this year. The windfall in net interest should be more than sufficient to offset the decline in investment activity.
HSBC currently offers a dividend yield of around 4.5% and appears to be undervalued with a P/E ratio of 7.
We appreciate HSBC’s diversification the best. It has businesses all around the world, but Asia, primarily China, accounts for almost two-thirds of its profits.
However, its exposure to China is a double-edged sword. Geopolitical unrest in the country is a threat, but its massive economic growth prospects within it and its neighbors are, in our opinion, much more favorable for the bank.
Due to its diversification, it is also less susceptible to the continuous problems that the UK is currently experiencing due to its out-of-control inflation.
As a result, the company has reported some impressive results thus far this year, with earnings before tax increasing to $12.9 billion in Q1 from $8.7 billion in Q1 of last year. It also disclosed plans for a $2 billion share buyback program in its earnings.