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Why I think the FTSE 100 is cheap given the fusion news

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In the beginning of September, the market cap of one company, Apple, surpassed the collective market cap of the entire FTSE 100. Given that the FTSE 100 consists of many leading global multinational companies, Apple’s achievement is pretty breathtaking. 

So how did one company achieve so much?

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Well, Apple did it by riding the development of mobile computing. Apple got into the smartphone trend at just the right time with the original iPhone. The company has dominated the lucrative high end of the market ever since. The company makes great products and has created a ecosystem that’s hard to leave. 

Speaking of development, I think another big one could eventually rival the smartphone in scale and benefits. I’m talking about the development of fusion technology. A group of MIT-associated scientists recently announced there’s a good chance fusion might be commercially viable by the 2030s. This would be more than a decade sooner than many had previously expected.

I think the announcement is bullish news for the FTSE 100. Here’s why. 

More sustainable future

If fusion is commercialised a decade earlier than expected, it could help reduce global warming. This in turn could lower the level of economic destruction caused by rising temperatures. Consumers would have more money to spend, and the FTSE 100 would likely have higher sales and profits given the global nature of many of its components. 

More importantly, the planet will be more sustainable, arguably making the FTSE 100’s earnings more sustainable. If the world is more sustainable, the Footsie should also have a higher valuation, in my opinion, all else being equal. 

Fusion technology could also lower the cost of energy, which would also benefit many companies in the leading British index.

Why fusion isn’t doing much for the FTSE 100 now

While I think the fusion breakthrough will likely benefit the FTSE 100, the index didn’t rally on the news. The index declined the day after the news made headlines on 29 September, As of 22 October, the index is actually lower than it was in late September. 

I think one reason for the index not rallying on the news is that the benefit of fusion is still years away. There is still a lot of work to be done. Given that many in the stock market only care about next quarter or next year, the ‘good news’ isn’t priced in. 

Nevertheless, as a long-term investor in the FTSE 100, I think the announcement offers a potential opportunity. As the technology becomes more viable, I think the market will factor in more of the fusion’s net benefit and the FTSE 100’s overall valuation will benefit. If management captures the opportunity correctly, I think the fusion news could be good for FTSE 100 components such as BP, too. 

Cheap

Speaking of valuation, I believe the Footsie index is cheap given its year-to-date decline. With a potential economic recovery next year, I think optimism could return and the stock market could rebound. 

There may still be a lot of short-term volatility and potentially more downside given the economic slowdown caused by Covid-19. But from perspective, the future’s still bright. Thanks to the recent advancements in fusion, it could be even brighter. 

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Jay Yao has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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