2023 has proven to be a challenging year for the FTSE 100 as early gains have failed to sustain momentum. Despite its relatively cheap valuation, the UK index continues to be overlooked by global investors. However, investors shouldn’t despair, with a new year, comes new value.
The mining sector appears to be on the cusp of a rebound, which could potentially provide a much-needed boost to the FTSE 100. As global economies recover and demand for commodities increases, mining companies are expected to benefit from higher prices and increased production. This positive outlook for the mining sector could help lift the overall performance of the index.
On the other hand, housebuilders may continue to face challenges in 2024. The UK housing market has been impacted by various factors, including rising construction costs, supply chain disruptions, and changing buyer preferences. These challenges may weigh on the performance of housebuilders and potentially hinder the FTSE 100's overall performance.
Mining for money
UK mining stocks are expected to recover in 2024 after facing challenges in recent years. The sector experienced a setback mid-year due to a strengthening dollar, which negatively impacted commodity prices and cancelled out the earlier rally seen in Q1.
Investors have been concerned about a potential recession, largely due to higher interest rates. However, there are signs that these fears are easing, and a 'soft landing' for the economy appears more likely. This positive outlook should contribute to the recovery of mining stocks.
Miners, such as Rio Tinto and Antofagasta, are currently featured on the list of potential investments. Rio Tinto, for instance, has maintained a stable position throughout the year with its shares priced at a reasonable 9.4 times earnings. With the dollar weakening and concerns about a recession subsiding, there is a possibility of a significant increase in commodity prices, which would greatly benefit the mining sector. Despite facing challenges in its iron ore business, Rio Tinto has managed to offset the weaknesses through rising prices and increased shipments. As confidence in the economy grows, the demand for commodities is expected to rise, further enhancing the appeal of Rio Tinto's shares, which also offer a yield of over 5%.
Another mining company worth considering is Antofagasta, primarily focused on copper mining. Although it may not be as diversified as Rio Tinto, Antofagasta anticipates a boost in production, leading to increased earnings. This positive outlook suggests that the current valuation of the company may not fully reflect its potential returns.
Overall, while there have been challenges for UK mining stocks, the outlook for 2024 appears more positive. As recession fears ease and commodity demand recovers, the sector is expected to rebound.
Digging too deep?
In contrast, there are several reasons why UK housebuilders may underperform in 2024.
Firstly, elevated mortgage rates could deter potential buyers from entering the housing market. Higher interest rates make borrowing more expensive, reducing affordability and potentially decreasing demand for new homes.
Additionally, the cost-of-living crisis in the UK could impact the housing market. Rising living costs, such as increasing energy bills and food prices, may leave potential homebuyers with less disposable income to allocate towards housing expenses. This could further dampen demand for new homes and negatively affect housebuilders' performance.
Furthermore, the construction industry may face challenges as a result of higher costs for building material and labour resulting from inflation. Inflation erodes the purchasing power of money, making it more expensive to acquire construction materials and hire skilled labour. These increased costs could squeeze profit margins for housebuilders and hinder their ability to deliver affordable housing.
Moreover, there has been a reduction in the target for new homes built in the UK. Government policies and regulations play a significant role in the housing market and any reduction in the target for new homes could limit the opportunities for housebuilders. This could lead to a decrease in the number of projects available and potentially impact the profitability of the sector.
These factors suggest that the UK housebuilding sector is likely to face challenges in 2024. However, it is worth noting that falling interest rates could provide some relief. Lower borrowing costs may stimulate demand for housing and support the industry. Nevertheless, the combination of the aforementioned factors indicates that housebuilders may underperform compared to previous years.
Predicting the unpredictable
In summary, while 2023 has been a disappointing year for the FTSE 100, there are some potential bright spots on the horizon. The global mining sector's anticipated rebound could provide a much-needed boost to the index. On the other hand, housebuilders may continue to face difficulties. It remains to be seen how these factors will ultimately shape the performance of the FTSE 100 in the coming months, and as we’ve seen in 2023, nothing is ever certain.
Chris Beauchamp is chief market analyst at IG Group and Axel Rudolph is senior market analyst at IG Group. The views expressed above should not be taken as investment advice.