We’re in the second half of the year, with plenty on the horizon that could make for volatility in the stock market. It kicks off tomorrow (4 July) with the UK general election. In coming months, we’re due several major central bank meetings, inflation and other data releases that could impact FTSE 100 stocks. With that in mind, here’s how I think things could pan out.
Events ahead
If we start with the general election, I actually don’t think we see a huge market reaction if the Labour party win a majority. This is because this eventuality is widely expected by people. Investors don’t like unpredictability, but if things happen as expected, there’s not too much to be concerned about in the short term.
Looking ahead, I think that the main driver for the FTSE 100 will be inflation and the reaction of interest rates. The latest data showed that inflation is now back at 2%, the target level of the Bank of England. This should likely support several cuts in interest rates between now and the end of the year.
If my prediction is correct, I think that the best Footsie stocks for me to think about buying will be ones that stand to benefit from lower inflation and lower interest rates. At the same time, I could look to add shares that could do well from increased Government spending in key areas such as property and healthcare.
Next up
One example of a stock on my watchlist for H2 is Next (LSE:NXT). The fashion and homeware retailer has been a face on the high street for over four decades. Over the past year, the stock has outperformed, rallying by 32%.
I think the stock could continue to do well as inflation continues to moderate. Consumers should feel more confident with their finances without costs spiralling higher. This could see them spend more on clothing and home furnishings. I think Next is well positioned to benefit from this, in that it isn’t high-end luxury but more middle market.
Further, Next should benefit from lower debt costs. In the annual report, it mentioned how net debt reduced by £97m to £700m for 2023. This is great, but another benefit will be felt through lower financing costs going forward. If interest rates do fall, it’ll make issuing new debt less expensive. This ultimately should help to boost cash flow and profitability.
One risk is the problem that Next has with external factors. For example, in the latest quarterly report, it spoke of how demand might be lower due to wet spring weather. To be at the mercy of the natural elements isn’t something investors will be happy about!
Making a call
Ultimately, my predictions for the coming six months are based on how I see the world right now. People might (and do) disagree with me. Yet that’s the beauty of the stock market. It’s made up of buyers and sellers, with those that make the correct calls rewarded in the long run.
This post was originally published on Motley Fool
