The New Year has ushered in yet more disappointment for investors in the FTSE 100 (FTSEINDICES: ^FTSE), with the index being down a whopping 5.3% since the turn of the year. Clearly, that is hugely disappointing and while in the coming days could see more falls, the long-term outlook for the index remains hugely appealing.
Challenges ahead
Certainly, the economic outlook is somewhat challenging. The Chinese economy is enduring a slowdown in its growth rate as it seeks to transition towards a consumer-led economy. And with its share prices being highly volatile, further negative impacts on the FTSE 100 can’t be ruled out in the short run. In fact, with Chinese shares being suspended just 30 minutes into trading today due to their fall of 7%, it appears as though investor sentiment could worsen across the globe in the near term.
Furthermore, the price of oil continues to plummet and Brent oil is now trading at an 11-year low. Tensions in the Middle East plus a Chinese slowdown could cause its price to fall further in the weeks and months ahead. With the FTSE 100 still having a 17%-plus exposure to the resources sector, such commodity price falls could cause its price level to plummet further.
Opportunity knocks
Despite these short-term challenges, though, the FTSE 100 remains a superb place to invest for the long term. In fact, the problems discussed above create an even better opportunity to buy into high quality companies at very appealing prices, since they create an even larger discount to intrinsic value through which investors can maximise their capital gains in the long run.
Evidence of this value can be seen in the FTSE 100’s dividend yield, which now stands at over 4%. Historically, this is high and has only been higher in the 21st century during the depths of the credit crunch when dividend payments were a lot less certain than they are today. Further evidence of the FTSE 100’s low valuation can be seen in its price-to-earnings (P/E) ratio that currently stands at less than 13 versus a long-term average of around 15.
Clearly, the FTSE 100 needs positive catalysts to push its price level higher. While there are a number of challenges that could hurt its performance in the short run, those same factors offer growth opportunities for those with a longer view.
For example, world energy needs are due to rise by 37% by 2040. While renewables will become a greater part of the energy mix, fossil fuels such as oil will continue to play a central role in the economic development of the emerging world. And while there’s a glut of supply at the moment, oil at $35 per barrel is simply uneconomic in the long run and is unlikely to last.
Similarly, China’s long-term growth story remains very encouraging. That’s because the country’s middle income earners are set to grow in number by 326m up to 2030, with demand for consumer goods set to rapidly rise. As such, the opportunity for earnings growth among consumer-focused stocks in the FTSE 100 is huge. And while China’s transition from capital expenditure-led to consumer-focused economy won’t be a smooth one, it’s likely to be a successful one. Through buying the FTSE 100 now, it’s possible to benefit from that growth in the long run.
