UK shares haven’t had the best of times this century. The FTSE 100 has trailed global stock markets for years, but there are good reasons why that may now change.
On 31 December 1999, the index ended the Millennium trading at 6,930. Incredibly, today it is around 600 points lower, at 6,360. Yet investors have still made plenty of money from UK shares over that time. First, most won’t have bought at the Millennium peak, but at cheaper prices. Second, they will have benefited from reinvested dividends.
Over the 20 years to 31 December 2019, the FTSE 100 rose just 8.8%, or 600 points. Yet if I had reinvested all my dividends for growth, my total return over that time would have been 122%, according to figures from Schroders. And that’s if I bought at the very top. If I bought at much lower levels, as almost everyone will have done, I will have generated a lot more growth.
Here’s why I’d buy UK shares
Why am I telling you this? Because I’ve just seen an interesting argument from investment analyst Brian Dennehy, of FundExpert. He reckons there is a clear potential for the FTSE 100 to rise 50% from here. If he is right, that would push the index towards the 10,000 mark and make investors who buy today rich. Especially as they will get dividends on top.
Dennehy says his prediction may look extreme, and admits it will take several years, but gives five reasons why it could happen.
- The UK stock market has effectively gone sideways for more than 20 years.
- UK shares are now cheaper than at any time since 1973, relative to the rest of the world.
- The impact of the pandemic has been to make what was cheap, even cheaper.
- Global investors have been very underweight the UK since the EU referendum of 2016.
- Once Brexit is done (in whatever form), global investors will have much greater certainty.
Dennehy sees plenty of pent-up optimism, but not a lot of money actually being invested. He reckons there is a wave of money waiting to wash across the UK, once sentiment turns. By contrast, he is wary of the US, which has been the world’s standout market over the last decade, saying it is “now self-evidently a mania”.
At the Fool, we are rightly wary of stock market predictions. “The future’s not ours to see“, as the words of the song go! What we do know is that buying UK shares when they are cheap always makes sense. That’s what I endeavour to do, with the intention of holding them for the long term to allow time for them to recover.
I believe we have a great opportunity today, despite the recent jump on the back of Covid-19 vaccine results. Nobody knows when the FTSE 100 will hit 10,000. It could be another 20 years. However, history shows that if I reinvest my dividends and I’m patient, I will make money from this stock market, whatever happens.
