Earlier this week, data showed that in December, inflation fell to 10.5% from the previous month. In turn, the November reading of 10.7% was lower than the 11.1% from October. This starts to give me the impression that inflation in the UK might have peaked. If I continue to get indications that this is the case over the next month or so, here are the FTSE 100 stocks that I think could beat the market in 2023.
Easing pressure on grocery prices
A clear group that will benefit are the supermarkets and grocery retailers. Last year, trading updates disappointed investors as companies flagged up that consumers were buying less due to the higher cost of food and drink. For example, Ocado noted a 13% decline in the average grocery basket value versus the same period in 2021. On average, customers had 48 items in their basket, versus 55 in H1 2021.
The stock price of many in this sector fell last year as investors factored in lower profits. Yet if inflation continues to fall, we should see this correlate to rising share prices for retailers in this area. Not only will supermarkets be able to return operating profit margins to normal, but shoppers will likely also feel more confident in buying more if they feel prices are under control.
I think this is one reason why some stocks have already started to move higher recently. Tesco shares are up 10% in just the past month, with J Sainsbury also gaining 9.3%.
Help for property prices
Another area that could benefit from lower inflation is property. For specific FTSE 100 ideas, I’m thinking Rightmove and British Land.
High inflation has forced the Bank of England to raise interest rates very quickly. This has put pressure on the mortgage market, with high rates making it unaffordable for many people to buy a home. In turn, this has been one factor that has pulled property prices down.
If inflation falls materially lower, the situation should reverse. Interest rates won’t need to head higher. If anything, forecasts could indicate some rate cuts in coming years. For fixed-rate mortgage deals, this could mean more attractive and lower rates. If this allows more to get on the property ladder, it’s good news for property-related companies.
Rightmove should see higher website activity and more listings from estate agents. British Land should see a move higher in the value of the portfolio.
Keeping an eye on FTSE 100 stocks
One risk is that inflation might fall, but at a slow pace. If it moves lower by only 0.2% each month, it’s going to take a long time before it’s down at a reasonable levels. So if it’s still above 10% in several months time, it could hinder the progress of the above stocks.
That’s why I’m putting the above ideas on my watchlist, but I’m going to wait and see how things play out in February. If it becomes apparent inflation is falling quickly, I’ll add the stocks to my portfolio.
The post If inflation has peaked, these are the FTSE 100 stocks I’ll snap up appeared first on The Motley Fool UK.
Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended British Land Plc, J Sainsbury Plc, Ocado Group Plc, Rightmove Plc, and Tesco 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