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Why 2023 could be a great year for FTSE 100 stocks

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In general, FTSE 100 stocks have outperformed their US counterparts during 2022. Over the last 12 months, the UK index has gained 2% while the S&P 500 has fallen by 15%.

I think that this is likely to be the story again in 2023. I don’t know how much I think each index will move by, but I’m expecting FTSE 100 stocks to fare better than S&P 500 stocks.

Investing in 2022

The major theme dominating stock market investing in 2022 has been rising interest rates. From 0.25% at the start of the year, interest rates have reached 3% in the UK and 4% in the US. As a result, value stocks have outperformed growth stocks. As interest rates rise, the opportunity cost of waiting for the future cash flows of growth stocks increases.

This is the main reason that the FTSE 100 has fared better than the S&P 500. The UK index has a much larger concentration of value stocks than its US counterpart.

Around 40% of the FTSE 100 consists of value stocks in the financials, energy, and materials sectors. By contrast, these stocks make up less than 20% of the US index.

That’s a major reason why FTSE 100 stocks have performed comparatively well this year. And I expect a similar result in 2023.

2023 expectations

I expect the main theme of 2023 to be recession. The interest rate increases in 2022 will, I think, be a significant headwind for corporate earnings.

As a result, I’m expecting stocks in defensive sectors to do well compared to others. These are shares in companies that should experience steady demand regardless of the macroeconomic environment.

These sectors include consumer defensives, real estate investment trusts (REITs), and utilities. The FTSE 100 has a much larger exposure to these three sectors than the S&P 500.

Defensive stocks such as Unilever, British American Tobacco, and National Grid account for around 23% of the UK index, compared to 15% of the S&P 500. This is why I think that FTSE 100 stocks will do better in 2023.

FTSE 100 stocks

Investing is about making predictions about the future. As such, there’s always an element of uncertainty.

If inflation falls dramatically and interest rates come back down, then speculative stocks could do well. That would favour the S&P 500  over the UK index, but I think it’s unlikely. Inflation has come down to 7.7% in the US, but it’s a long way short of the Federal Reserve’s 2% target. In the UK, inflation is at 11% and still rising.

As such, I think that FTSE 100 stocks will outperform in 2023. I expect headwinds for corporate profitability to cause investors to favour defensive stocks, boosting the UK index.

The post Why 2023 could be a great year for FTSE 100 stocks appeared first on The Motley Fool UK.

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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c. and Unilever Plc. 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.