Why I think investors could be wrong about the FTSE 100

The FTSE 100 (INDEXFTSE: UKX) may offer higher return potential than investors currently expect.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

While the FTSE 100 has been able to generate improving levels of capital growth so far in 2019, it continues to trade significantly below its record high. This was achieved in May 2018 when the index reached an all-time high of around 7,877 points. However, even that level could prove to be relatively low in the long run, with the index potentially offering stronger growth and better value for money than many investors realise.

Value for money

For some investors, a FTSE 100 price level of over 7,000 points may seem to be relatively high. After all, in the last 20 years it has rarely traded higher than this level, occupying a range of 3,600 to 7,718 points during that period.

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However, its constituents have delivered growth during that period, so basing its value on past price levels may be illogical. Evidence of this can be seen in the fact that the index has a dividend yield of over 4% at the present time. It has rarely offered a yield above 4% – expect for during periods of significant financial uncertainty. While the threat of a global trade war, Brexit, and rising US interest rates are risks facing the world economy, they’re not anywhere near as significant as the financial crisis or dot com bubble.

As such, it could be argued that the FTSE 100 is very cheap at present. As a comparison, the S&P 500 has a dividend yield which is half that of the FTSE 100. This suggests that the index could double to over 14,000 points and still not appear expensive when compared to other major indices.

Growth potential

While large-cap shares have a reputation of failing to deliver high growth rates, there are a wide range of FTSE 100 stocks which could buck the trend. The main reason for this is the growth potential of emerging markets such as China and India. While Brexit may be a major concern for UK investors at the present time, the reality is that over the next 20 years global GDP growth is likely to be centred on India, China and other emerging markets, rather than Europe.

Since a large number of FTSE 100 stocks have exposure to fast-growing markets, they may prove to be the major beneficiaries of growth across the developing world. While many mid-caps and small-caps also have exposure to such markets, FTSE 100 companies may be able to occupy more dominant positions in major emerging economies in order to maximise their overall returns.

Outlook

With the FTSE 100 potentially offering strong growth, as well as what seems to be a low valuation, it could enjoy impressive total returns in the long run. While its performance in the last two decades has been mixed and somewhat lacklustre, the next two decades could prove to be increasingly prosperous for the UK’s main index.

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