Having reached an all-time high of almost 7,900 points last year, many investors may consider the FTSE 100 is still relatively high today. It trades at around 1,000 points below its record high, which is approximately the same level as 20 years ago.
During the last two decades, the index has failed to deliver on the growth potential many investors have felt it offers. Now, though, it may be worth significantly more than its current price level. As such, it could offer a number of appealing investment opportunities for the long term.
Valuation
At the present time, the FTSE 100 has a dividend yield of around 4.6%. Compared to its historic average yield of between 3% and 3.5%, that’s exceptionally high. In fact, it’s only been higher than its current level in one other time period during the last 20 years. That occurred in 2008/09 when the financial crisis was in full swing and the index’s dividend yield increased to 5.5%.
Back then, though, there were severe doubts that the index’s major constituents would be able to deliver dividends over the near term. As such, it could be argued that today is a more appealing period in which to invest in the index, since the prospects for the world economy appear to be stronger than they were during the financial crisis.
Assuming that the index reverts to its long-term average yield of 3-3.5%, it could trade as high as between 9,000 and 10,500 points. This would represent a rise of between 30% and 52% versus its current price level, which suggests the FTSE 100 has investment appeal based on its current valuation.
Catalysts
In terms of what could propel it to a significantly higher level, the outlook for the world economy continues to be relatively robust. Although there are fears surrounding growth in China, as well as the impact of US interest rate rises, the IMF forecasts world GDP growth will be 3.5% in 2019. Furthermore, the UK economy is expected to grow by 1.5% this year, which is ahead of a number of EU nations such as Germany and Italy, which are expected to grow by 1.3% and 0.6%, respectively, in 2019.
As such, it could be argued that potential risks from Brexit are fully priced into the index. And since the majority of income generated by its constituents comes from international markets, a growing world economy may mean that the FTSE 100 enjoys a period of stronger performance than many investors are anticipating.
As ever, stock markets move in cycles. While the FTSE 100 may be viewed as being in a downtrend at present, after falling by around 1,000 points in eight months, for long-term investors it could offer up a buying opportunity. With such a low valuation, it may present a high income return, as well as an impressive capital growth outlook over the coming years. Due to this, now could be the right time to invest in a diverse range of shares for the long term.
