Although many market participants are becoming concerned at the FTSE 100’s (FTSEINDICES: ^FTSE )price level, there could still be a lot for investors to get excited about. Indeed, the UK’s leading index has made little headway in 2014, being up only 0.5% year-to-date, which is a disappointment after a strong showing in 2013 and with the high expectations that were abounding earlier in the year.
Despite this, the FTSE 100 offers investors vast long term potential. Here’s why.
Great Yields
While research released this week showed that UK dividends increased by just 1.2% in the second quarter of this year, the FTSE 100’s yield of 3.4% remains hugely attractive. Indeed, there are no other mainstream investments that offer a net yield of 3.4%, unless considerably more risk is taken. For example, high-street savings accounts offer less than 1.5% unless you’re happy to tie your money up for a number of years, while yields on gilts are little more than 2% and come with significant interest rate risk. Furthermore, seemingly insatiable house price growth has meant that net yields on property are not particularly attractive unless large amounts of leverage (and risk) are employed.
Growth Potential
One notable feature of recessions is their negative effect on investors during the next boom period. In other words, investors who made mistakes and lost out during a recession (perhaps due to excessive risk taking) switch to the polar opposite, becoming overly cautious and wary of losing their initial capital. There could be an element of this in the numerous predictions of an impending market fall.
Certainly, the world economy has its imperfections and the FTSE 100 has risen considerably since its March 2009 low of around 3,400 points. However, the banking sector is far stronger now than before the credit crunch, which means that another full-on banking crisis is far less likely.
In addition, Central Banks are seemingly determined to deliver growth at any cost. Indeed, they seem reluctant to even raise interest rates to 1% despite clear signs that the UK economy is improving, with a similar picture being present in the US. Therefore, with highly supportive Central Banks, the world economy could continue to grow at a brisk pace, which would have a positive impact on share prices.
Low Valuations
Despite this, the FTSE 100 is still stuck within 5% of 7,000 points — the same level it occupied around 14 years ago. Compared to the S&P 500, it is dirt cheap, with a P/E ratio of 13.9 versus 19.5 for the S&P 500. Therefore, now could be a great time to buy shares in a wide range of FTSE 100 companies.
