The FTSE 100 has rallied substantially recently. In the last month alone, the index has surged by around 10% in fact.
One key reason for the rally could be the positive vaccine candidate news release by Pfizer and Moderna. According to interim data, both companies’ vaccine candidates are around 95% effective. With such a high efficacy rate, there is more hope that the world can return to normal faster if the vaccines are approved.
Given the rally, is the leading British index still a bargain? Here’s what I think.
Long-term upside?
Although the future is uncertain, I think the FTSE 100 is a bargain at current prices in the long run.
In the long run, I think the Footsie has a lot of potential. This is thanks particularly to its exposure to productivity improvements from technology advancement. Specifically, technologies such as AI and 5G could really unlock a lot of economic activity. According to estimates made by ABIresearch, the direct/indirect/combined output of 5G and AI to the global economy could reach as much as $17.9tn annually in 2035. At that time, the research firm estimates almost two-thirds of the benefit could be productivity related.
Given that many FTSE 100 components are global multinationals, I also think the Footsie has a long earnings growth runaway as emerging markets incomes normalize. With the average GDP per capita of £8,500 being relatively low versus that of the West, I think there is potential for a faster rate of growth in other parts of the world, and many FTSE 100 companies that operate in those areas will benefit.
If the market takes the long view, I don’t see why it can’t go higher.
Short-term uncertainty
Although I think the FTSE 100 is a bargain in the long term, I don’t really know what’s going to happen in a month or a year from now. The near term is uncertain as any number of things can happen that could send the index lower. Any number of things could also send the index higher.
Given everything that has occurred, I think the index has a higher probability of rising simply because of the potential vaccines. That, and the possibility of the world returning closer to normal next year.
In terms of what might send shares one direction or the other, I’d follow the next earnings reports and management outlooks. If the earnings reports and outlooks are better than expected, I think the Footsie could potentially continue the rally.
In terms of expectations, analysts expect FTSE 100 earnings to rise substantially next year. According to a report compiled by AJ Bell using data a few months ago, analysts expect FTSE 100 adjusted net profit to rise by around 47% next year. In terms of whether that magnitude of increase is achievable, I think it’s definitely possible.
There is a lot of fiscal and monetary stimulus going around. Due to the pandemic, 2020 earnings are temporarily depressed in my view.
