The flagship UK stock market, the FTSE 100, currently sits just above 8,000 points. When examining where it could head over the next year, I often play a game with my friends of having an equal distance estimate of a stock or index above and below the current price.
I then think about which seems to me to be the most logical, try and back it up with high conviction ideas, then consider where to invest.
Here’s my take.
Key considerations
Firstly, let’s factor in historical performance. The FTSE 100 was last at 6,000 in late 2020, as it tried to recover from the pandemic crash from earlier that year. The index has never traded as high as 10,000 points. Rather, the all-time highs are just shy of 8,500 points, posted in Q2 of this year.
Over the past decade, the average annual return has been 6%. If I were to assume that the percentage stays the same for the coming year, we’re unlikely hit either target level.
In my view, we’re more likely to hit 10,000 points before 6,000. One reason is that the long-term trend of the market is higher. Sure, we’ll have blips along the way. But fundamentally, history shows me that the index goes up.
Another factor is that the UK stock market has some catching up to do relative to global markets. For example, the average price-to-earnings (P/E) ratio is 15.1. If I look across the pond at the S&P 500, the average P/E there is 30.1. Therefore, I expect value investors to start selling some overvalued US shares and allocating the money in cheaper UK ones. This should help to push up the index overall.
A helping hand
In terms of a specific stock that I think could help push the index higher, I like 3i Group (LSE:III). The private equity and venture capital group has seen the share price rally 59% over the past year.
The company holds a portfolio of privately listed equity holdings in various businesses. It tries to make money by identifying opportunities in the market where it can buy and then later sell for a profit. It’s very similar to what an investment fund would do with public stocks. The key difference is that 3i invests in firms not on the stock market.
In fiscal H1, the portfolio returned 10%. The CEO commented that “action is the major contributor to our returns and continues to produce sector-leading growth”. I really like this, as active management in what can be a tricky sector to navigate is clearly the way forward.
One risk with private equity is that money can be locked up for a long time. As the stock isn’t public, it can be hard to find a seller in a quick period of time, potentially causing operational problems. Ultimately, I have the stock on my watchlist as a potential one to buy for 2025.
And even though I think it might be a struggle for the index to hit 10,000 points next year, I certainly think we’ll be closer to that target than 6,000 by December 2025.
This post was originally published on Motley Fool
