Although the FTSE 100 has disappointed in 2014, being down 5.5% year-to-date, it could make a very positive contribution to your retirement fund over the long run.
Certainly, it is no higher at present than it was when the dot.com bubble burst at the turn of the century, but this doesn’t mean that the index of the UK’s biggest publically listed companies is worth avoiding. Indeed, the next 14 years could prove to be far more rewarding for investors in the FTSE 100 and it could help to make them (and you) retire rich. Here’s why.
Favourable Interest Rates
Although there has been a lot of talk recently about interest rate rises, with the UK housing market moving ever-higher, it seems unlikely that this will take place at a brisk pace. Certainly, there could be a small increase in rates over the next couple of years, but the days of 4% – 5% interest rates seem to be many years away. That’s because we continue to experience a deflationary period that requires low interest rates to stave off negative price growth.
This is good news for investors in the FTSE 100, since it continues to encourage investment in assets such as shares (due to interest on cash balances being so low) and also makes the 3.5% yield of the FTSE 100 seem even more attractive. Indeed, it would be of little surprise for the price level of the index to be bid up over the medium term, as investors seek a higher income component of total return.
A yield of 2% (the same as the USA’s main index, the S&P 500) would mean a FTSE 100 price level that is over 11,000 points, which is 72% higher than its current price level. While this will clearly not come around over the short to medium term, it shows that if interest rate rises do disappoint moving forward, a far higher price level for the FTSE 100 could be on the cards.
Great Value
While the FTSE 100’s price to earnings (P/E) ratio of 13.3 may sound fully valued, its long term average is more like 15. Therefore, there could be scope for an upward rerating over the medium term.
Furthermore, the S&P 500 has a P/E ratio of 18.4, which is 38% higher than that of the FTSE 100. Were the FTSE 100 to trade on the same P/E ratio as the S&P 500, it would mean the price level of the UK’s major index being as high as 8800. As with the potential fall in yield, this is unlikely to take place over the near-term, but shows that there is clear potential for the FTSE 100 to move higher.
Looking Ahead
While the FTSE 100 has disappointed over the last fourteen years (and particularly this year), it continues to have huge potential. Certainly, the figures mentioned in this article may seem overly optimistic but, with the S&P 500 having risen by 166% since March 2009, there could be much more to come in future years from the FTSE 100 and, as a result, it could help you to retire rich.
