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The FTSE 100 is the world’s most ‘unloved’ index. I’d still buy this cheap share!

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With one trading day remaining, this is surely set to be the best month for shares in modern history. On Friday, the FTSE 100 index closed at nearly 6,368 points, up a massive 790 points since Halloween. That’s a gain of just over 14% in only four weeks, the best month in the Footsie’s 36 years. In the US, stocks are also enjoying a great month, with the S&P 500 index hitting record peaks. Likewise, the NASDAQ index is at all-time highs and the Dow Jones Industrial Index rose above 30,000 points for the first time.

Why is the FTSE 100 so shunned?

But sadly, not all is as rosy as it seems on this side of the Atlantic. Although the FTSE 100 has had a record month, it’s had a grim year. The index is actually down 1,175 points (15.6%) in 2020. Also, the FTSE 100 is currently at levels first reached in early 1999, over 21 years ago! Why has this index performed so poorly and become so unloved?

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The first reason for the FTSE 100’s most recent decline is Covid-19, which has crushed corporate profits and smashed economic growth. But this doesn’t explain the index’s relative underperformance. The second reason is Brexit, arriving in just 32 days, possibly as a no-deal departure from the European Union. This self-inflicted blow partly explains why UK shares are doing so poorly versus foreign stocks.

The third reason for the FTSE 100 being sickly is to do with its composition. It is packed with ‘old economy’ stocks, such as banks, miners and energy companies. In a world transitioning to a low-carbon future, green investors shun stocks in, for example, oil & gas firms. They’d rather back exciting US tech stocks such as Elon Musk’s Tesla. Also, these unpopular sectors are economically sensitive and we’ve just endured the UK’s worst collapse in 300 years. That’s bad news for banks, for instance.

I think Lloyds offers deep value

Here’s one mind-blowing fact: the five biggest US tech stocks are worth a total of $7trn. That’s roughly twice the market value of all the world’s banks and energy companies combined. For me, this demonstrates the over-valuation of tech stocks and the under-valuation of old-economy shares in the FTSE 100.

For example, take the cheap shares of Lloyds Banking Group (LSE: LLOY), which have suffered a torrid 2020. Lloyds is the UK’s largest retail bank, with over 30 million customers. With origins dating back to 1695, Lloyds’ big brands include Bank of Scotland, Birmingham Midshires, Halifax, MBNA and Scottish Widows. Unfortunately, being the UK’s biggest lender in a global pandemic has smashed Lloyds’ share price.

On 13 December last year, Lloyds shares hit a 52-week high of 73.66p. As the global storm gathered, the shares plunged in the March market meltdown. They recovered in the summer, before collapsing again, crashing to a lifetime low of 23.58p on 22 September. Two days later, I saw a lifetime of value in Lloyds shares at 24.58p (1p above the low). They have since soared to close at 37.3p on Friday, up by more than half (51.3%) in just over two months.

Today, Lloyds’ market value is just £26.4bn, a fraction of its former glories. Yet the Black Horse bank actually made a £1bn pre-tax profit in the third quarter. Also, its hefty dividend will surely return in 2021. That’s why I still think Lloyds shares have further to go. Hence, I’d happily buy these FTSE 100 shares today, ideally inside an ISA, to enjoy decades of tax-free dividends and capital gains!

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Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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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