It may not necessarily feel like 2019 has been a successful year for the FTSE 100, but the index has gained around 13% in the last 12 months. When its 2019 dividend yield of around 4.5% is added to this figure, the index generated a total return of over 17% in just one year.
That’s a good result and is roughly twice the annualised total return of the FTSE 100 since its inception in 1984. It shows that while risks facing the world economy have been high this year, the index has been able to deliver strong returns.
Looking ahead, could further growth be ahead for the FTSE 100? Could it reach 8,000, 9,000 or even 10,000 points in 2020? That latter figure may seem a bit optimistic but what are the chances it could reach it?
Valuation
Despite its surge in 2019, the FTSE 100 continues to offer good value for money. For example, it has a dividend yield that’s in excess of 4.3%. That’s higher than its historic average, and is also significantly above the yields offered by other major indices such as the S&P 500. That American index currently yields just 1.8%. If the FTSE 100 was to rise to a price level where it also yielded 1.8%, it would trade at around 18,250 points!
As such, there seems to be considerable scope for the FTSE 100 to deliver improving performance after what has been a relatively disappointing 20-year period. Despite its rise in 2019, the index trades just 10% higher than it did 20 years ago. This highlights both how overvalued it was during the tech bubble in 1999, as well as the scale of its current undervaluation.
Growth catalysts
Of course, being undervalued is not enough to push the FTSE 100 to over 10,000 points. It must have catalysts to encourage earnings growth among its members, as well as reasons for investors to become more bullish about its prospects.
In 2020, there are a number of risks facing the world economy. They include the impact of Brexit, a global trade war and political uncertainty in the US. However, those same risks have been present in the past year, and yet the index has moved higher. As such, it would be unsurprising for investors to continue to be bullish about the world economy’s outlook – especially since the global GDP growth rate is expected to increase in 2020 versus its 2019 level.
Long-term opportunity
The FTSE 100 would need to gain around a third in 2020 to reach 10,000 points and while not impossible, it doesn’t seem probable in such a short period. However, the long-term appeal of the index continues to be high, and eventually reaching 10,000 points seems likely after the index’s seven-fold gains since inception.
Therefore, buying high-quality large-cap shares at favourable prices could be a sound strategy. They may not surge higher in the next 12 months, but could improve your financial future over the coming years.
