So, it’s finally happened. The S&P 500 has hit 2,000 points for the first time in its history. Meanwhile, the FTSE 100 has yet to even break its 2000 and 2007 highs, with the UK’s leading share index apparently unable to break the 7,000 point barrier. However, here’s why it could happen a lot sooner than you think.
Undervalued
A lot is made of the FTSE 100’s current valuation, with many investment commentators saying that the FTSE 100 is due a large correction as a result of it having risen since its 2009 lows. However, the FTSE 100 does not appear to be overvalued relative to its own history, nor when compared to other major indices.
For example, the FTSE 100 currently trades on a price to earnings ratio (P/E) of 13.7. This is well below the S&P 500’s P/E of 19.2. In fact, the S&P 500’s P/E is now 40% higher than the FTSE 100’s, which means that if the FTSE 100 were to trade at an equal P/E to its larger cousin across the pond, it would currently stand at a whopping 9,500 points.
Furthermore, a P/E of 13.7 is not particularly high by the FTSE 100’s historical standards. It has been much, much higher in the past before a large correction has taken place. Certainly, the FTSE 100 may no longer be dirt cheap, but it’s not expensive, either.
A Psychological Barrier
One reason why many UK investors currently think the FTSE 100 is expensive could be history. The FTSE 100 has been at its current level of 6775 points many times before and has never pushed upwards by more than a couple of hundred points. Therefore, many investors may become wary of buying at such levels, which is making the FTSE 100 ‘stall’ when it comes within 5% of the 7,000 barrier.
However, earnings at FTSE 100 companies are growing each year and, as time goes by, 7,000 becomes a relatively ‘lower’ level (in terms of the index’s fair value). Furthermore, with the FTSE 100 currently yielding around 3.5%, it easily beats the yield on bonds and, with interest rates set to commence their long, upward ascent, demand for shares could pick up significantly moving forward.
