Well, that wasn’t supposed to happen! The Scottish referendum’s ‘no’ vote was meant to be the catalyst that pushed the FTSE 100 to record highs. Instead, it has fallen by over 2% during the last week alone and, perhaps more importantly, is showing little sign of reversing the trend.
Despite this, I’m still optimistic about the future performance of the FTSE 100 and believe that it’s only a matter of time before it surpasses 7,000 and beyond. Here’s why.
Central Bank Support
While the FTSE 100’s price to earnings (P/E) ratio of 13.6 may not sound all that appealing on a standalone basis, with Central Banks across the globe providing a support mechanism to various economies (including the UK), it means that the economic situation is unlikely to deteriorate significantly over the medium term.
Certainly, regions such as Europe have their problems, with deflation still appearing to be a potential threat. However, as has been shown in the last few years, Central Bankers are willing to throw whatever it takes at economies across the developed world to get them growing again. With this level of commitment, it’s surprising to see UK investors remain cautious even after the Scottish referendum.
Great Value
Indeed, a glance at the US market shows perhaps where the FTSE 100 should be right now. With the same ultra-loose monetary policy that has been present in the UK, the S&P 500 has kicked on to all-time highs and now sits on a P/E ratio of 19.4. That’s 43% higher than the FTSE 100’s P/E ratio and shows that the UK’s major index remains cheap on a relative basis.
Different Exposures?
Of course, if the respective stock markets were full of companies that only operated domestically, it would perhaps make sense for there to be such differing valuations. However, most of the companies on both indices have truly global footprints and so the scale of the difference in valuations makes little sense.
Looking Ahead
While it can be frustrating to see other major indices make all-time highs, especially when the FTSE 100 is lower than it was on New Year’s Eve 1999, I’m still optimistic about the index’s longer-term future.
The UK economy continues to move from strength to strength and, while Europe may need a bigger stimulus package than is currently on the table, the long term prospects still look favourable for investors at current price levels.
