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3 reasons to invest in the FTSE 100 in 2023

British flag, Big Ben, Houses of Parliament and British flag composition
Image source: Getty Images

Investors will remember 2022 as a year of soaring inflation, rising interest rates, the Ukraine war and recession fears. And above all else, plunging stock markets. So it’s noteworthy that the FTSE 100 ended the year with a modest annual gain.

This meant Britain’s blue-chip index outperformed all of its global peers last year. In the US, the S&P 500 sank more than 19%, while the tech-heavy Nasdaq tumbled 33%. It was the worst year for the major indexes across the pond since 2008.

The FTSE 100 benefited from its high concentration of energy stocks and miners. BP and Shell both performed strongly, rising 42% and 43%, respectively. The oil majors benefited from high oil and gas prices because of the Ukraine war.

Shares of mining giant Glencore jumped 46%, also driven by unusually high commodity prices. But the best-performing Footsie stock in 2022 was defence contractor BAE Systems. It surged 55% on the back of rising geopolitical tensions.

Here are three reasons why I think the FTSE 100 remains an attractive investment in 2023.

Value

Despite the rise of some of its largest constituents, the FTSE 100 still looks great value. It has a forward price-to-earnings (P/E) ratio of 13.2. That’s lower than the S&P 500, which has a forward P/E ratio of 17.7.

And when I look at the current valuations of some of last year’s popular stocks, they don’t seem overpriced. That means their dividend yields are still very enticing.

2022 performance

Price to earnings (P/E)

Price to sales (P/S)

Dividend yield

BAE Systems

+55%

19.8

1.32

3.0%

Glencore

+46%

5.4

0.35

8.7%

Shell

+43%

5.7

0.54

3.5%

BP

+42%

6.5

0.47

4.0%

Imperial Brands

+27%

8.8

0.6

6.8%

I think stock valuations will again be scrutinised this year, making the FTSE 100’s cheapness more appealing to investors.

Dividends

The FTSE 100 has a dividend yield of 3.8%, which is significantly higher than the S&P 500 average (2.2%). And the UK market has individual stocks yielding much more than the average: for instance, insurer Legal & General (7.5%) and National Grid (5.1%).

Most analysts expect 2023 to set a new record-high for FTSE 100 dividend payments. And dividend cover is 2.24 times earnings, which represents the best cover since 2012.

I think this makes it extremely attractive to global income investors.

Global index

The final reason I think the British blue-chip index looks attractive is because it’s truly global. While the FTSE 250 is more closely correlated to the UK economy (and subsequently recorded its worst performance since 2008), the FTSE 100 is an internationally-focused index.

Around 82% of FTSE 100 revenues are from overseas markets. So the fact that it doesn’t reflect the fundamentals of the UK economy should be a positive, considering the gloomy economic forecast for the UK.

Of course, nobody knows how things will pan out. The Footsie may remain cheap and dividends could be cut. And diversification of earnings might not turn out to as attractive if a truly global recession takes hold.

Nevertheless, I think the UK stock market will remain an attractive place to invest in 2023. Whether it’s through an index tracker or individual stocks, the FTSE 100 looks good to me. It’s where I’ll be doing most of my stock hunting.

The post 3 reasons to invest in the FTSE 100 in 2023 appeared first on The Motley Fool UK.

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Ben McPoland has positions in BAE Systems, Legal & General Group Plc, and National Grid Plc. The Motley Fool UK has recommended Imperial Brands 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.

Motley Fool UK 2023