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Yesterday, the FTSE 100 passed 7,700 points, the highest level in a year. We might only be getting started in 2023, but there are already some positive signs that I’ve noted from different sources to support the index moving even higher, possibly even above the psychological 8,000 points. Let me explain!
Happy to borrow more
The Financial Times reported that US companies issued $63.7bn worth of bonds in the first week of January. Even though this is slightly lower than the same time in 2022, bond yields are much higher now than at the start of last year.
Why is this good news for the UK stock market? The international firms on the FTSE 100 will have a similar profile to their US counterparts, so I’m pretty sure bond issuance has been similar over here. Even though the cost of borrowing is still high, it shows that companies are starting the year feeling more confident to borrow money.
If management teams are happy to borrow now, they must feel confident they can afford to repay their debts. This is a change in fortunes from most of last year when bond issuance was down heavily. I think this bodes well for stronger company performance in 2023, helping to lift the general FTSE 100 index higher.
British pound still weak
During the autumn, the British pound fell heavily with the political turmoil surrounding ex-PM and Chancellor Liz Truss and Kwasi Kwarteng. Even though it recovered slightly, it has started to fall again in the past few weeks against the US dollar and the euro.
This is actually good news for the stock market. Historically, a weak currency makes it more attractive for foreign investors to buy UK assets. This includes property but also FTSE 100 stocks! If the pound continues to be under pressure in coming months, I think foreign buyers could help to push the market higher.
Interest rates peaking
The sharp rise in interest rates last year didn’t help the stock market. It seemed like every month the Bank of England was increasing the base rate by another 0.5%. However, most analyst forecasts indicate that we’re close to reaching the peak, with expectations for the rate to reach 4.5% in early spring.
From the current level of 3.5%, this would suggest only a couple more 0.5% hikes. If this is the case, then I think the FTSE 100 will react positively when it’s confirmed that rates have peaked.
Reaching 8,000 points
From the current price level, the next target will be the all-time high of 7,877 points from May 2018. If that price is met, there isn’t much standing in the way of positive momentum taking the index up to 8,000 points this year.
We might not be in a bull market, but 8,000 points is only 4% away from the current price. This is hardly a huge ask, especially when I add together the impact of company confidence, a weaker currency and peak interest rates.
The main risk to my view is if inflation remains unexpectedly high, forcing the Bank of England to continue to raise rates past current forecasts and stunting economic growth.
To capitalise on this potential move higher, I like some of the suggestions in the top British shares to buy for January.
