Since reaching a record high of 7,877 points in May, the FTSE 100 has experienced a significant decline. It has fallen by around 14%, which is more than two-thirds of the way towards bear-market territory.
Investor sentiment, it seems, has capitulated. Fears surrounding the outcome of the Brexit process, plus wider concerns about the world economy, seem to be weighing on the minds of investors.
Although there is scope for this trend to continue, the FTSE 100 may now offer excellent value for money for long-term investors. Furthermore, it could deliver high levels of growth as well as a stronger return compared to other major asset classes.
Valuation
Since the index trades at a lower level than it did 19 years ago, it appears to be relatively cheap at the present time. Clearly, the dotcom bubble caused its price to move to an unsustainable level in 1999, which ended with a market crash. But even so, the FTSE 100 appears to be relatively cheap given the recent performance of the world’s major economies.
For example, the US economy is growing at an exceptional pace. This is despite its tightening monetary policy, which thus far does not appear to have choked off its overall performance. Similarly, China is performing better than many investors had expected, with its ‘soft landing’ still seeing a relatively high pace of GDP growth compared to other major economies.
The FTSE 100’s dividend yield is currently around 4.5%. This is historically high, and suggests that the index offers a margin of safety. As such, buying it now may not lead to high returns in the short run, but history shows that it is likely to deliver a recovery over the long run.
Relative appeal
While many investors may be unsure about buying FTSE 100 shares at the present time due to the potential for further volatility, there is a lack of appeal elsewhere among other major asset classes. Cash, for example, offers a return that is below inflation. As a result, all investments in cash are losing money in real terms, with this situation unlikely to change in the medium term.
Similarly, UK interest rates are forecast to increase over the next few years. This could make bonds less appealing, since their prices move inversely to interest rates. Meanwhile, property continues to suffer from changing tax legislation as well as more onerous buy-to-let mortgage requirements.
As a result, it appears as though shares offer the most appealing risk/reward ratio of the major asset classes for the long run. The FTSE 100 may encounter further challenges and could yet sink further after a tough six-month period. Brexit as well as international concerns about tariffs and rising US interest rates could hold back the index to some degree. However, its valuation suggests that it is cheap right now, and this situation is unlikely to last in the long run.
