A few weeks ago, I wrote about the performance of Tesco (LSE:TSCO) over the past year. I saw how I would have lost around £120 from a £1,000 investment in Tesco shares if I’d bought then. I don’t own the stock at the moment, but it’s on my watchlist. So, my thinking is now turning to what could happen over the next year.
A key influence for the next year
Of course, I can’t predict the future. But what I can do is think about what relevant factors have influenced the share price in the past. Then by adding my opinion on what I think the future holds around those points, I can offer a viewpoint on if they will help or hurt the stock.
One of the main things on my mind is inflation. A year ago, it was at 3.1%. It’s now at 9.9%. Tesco has cited inflation as putting pressure on profit margins and causing customers to change some of their spending habits in store. Going forward, how it deals with price rises is key.
I don’t expect inflation to increase significantly from the 10% level but struggle to see it moving back to the target of 2% in the next year. As a result, I don’t think Tesco shares should be negatively impacted as much as they have been this year due to this factor.
The impact of economic performance
Another influence is how the broader UK economy performs. This impacts the share price in a couple of ways. At a stock-specific level, consumers hit by the cost-of-living crisis will cut back on spending, including on some of Tesco’s products. At a higher level, the share price could fall if investors in general sell stocks out of fear and move to cash.
I think we’ve already seen a lot of bad news factored in. This can be seen from the 15% fall in the Tesco share price in the past month, along with the fall in the FTSE 100 below 7,000 points. There could be some further downward pressure, and I think investors are already bracing for the worst.
Pulling everything together on Tesco shares
In my opinion, the next year is going to be tough for Tesco shares to move materially higher. However, I don’t expect them to fall as much as they’ve done over the past year. The shock of inflation and the cost-of-living crisis have already hit the share price.
At a broader level, I think Tesco shares could outperform peers including Ocado and J Sainsbury. This is because it services a slightly lower end of the market. Customers of the competitors could even switch to using it for cheaper products.
I also expect Tesco to outperform the FTSE 100. It should be less exposed to a fall due to the defensive sector it operates in.
As such, I think £1,000 now might only translate to £1,025-£1,050 in a year’s time. But I still think this makes it one of the better options in the FTSE 100 now. Therefore, I think I’ll allocate a small amount of money to the stock.
