The FTSE 100 has increased by 90% in the last decade. In doing so, it has reached an all-time high of 7,778 points. While this may sound like an impressive return, the reality is that the index has lagged other major global indices. For example, the S&P 500 has gained 165% during the same period. And with the FTSE 100’s rise working out as an annualised gain of 6.6%, it is not an especially strong result during the longest bull market in decades.
Growth potential
Of course, the performance of the UK economy has not been as strong as that of the US in the last couple of years. With 25% of income from the FTSE 100 being generated in the UK, this could have held back its performance to some degree. The US economy, in contrast, is enjoying its strongest period of growth in a number of years. Confidence is high, and this is encouraging greater risk-taking than is the case in the UK ahead of Brexit.
Despite this, Brexit could prove to be a positive catalyst on the index in future. It has the potential to weaken the pound, which may provide a translation benefit for the companies in the index which operate internationally and report in pounds. And with the global economy continuing to go from strength to strength, the prospects for the majority of companies in the index appear to be sound – especially since in many cases they are cheaper than their global rivals that are listed elsewhere.
Valuation
With the FTSE 100 having a dividend yield of 4%, it seems to be undervalued at the present time. Historically, the index has had a lower yield during bull markets, and this could mean that a higher price level is warranted. The S&P 500’s dividend yield currently stands at around 1.8%. If the FTSE 100’s yield was at the same level, the index would be trading at around 16,700 points. While that may seem unachievable – even over the long term – the reality is that its current price level suggests that it may have significant upside potential ahead of it.
In terms of potential catalysts, continued global economic growth could be key to boosting the FTSE 100’s valuation. The world economy is forecast to grow at around 4% per annum in the next two years, and this could push earnings higher for the resources, financial and consumer stocks which continue to be dominant among the index’s constituents. And if the UK economy is able to perform well despite Brexit risks, this could also help to boost the index’s outlook.
Takeaway
A level of 10,000 points would put the FTSE 100 on a dividend yield of 3%. This would not be a particularly low yield versus its historical level. It suggests that the index could be cheap at the present time, and that significant upside potential could be ahead over the long run. As such, now could be the right time to buy large-cap stocks.
