FTSE 100 shares didn’t have a great year in 2020. The index declined 14.3% as the pandemic hit the bottom line of many leading component companies.
Due to the poor performance, the Footsie was the worst performing major international stock index for 2020, lagging America’s S&P 500 by a wide margin. While the S&P 500 rallied over 16% last year, the FTSE 100 turned in its worst performance since the global financial crisis.
The good news is now it’s a new year. With a new year comes the potential for new beginnings and new developments. Given the potential for new developments in 2021, I think the fundamentals for the FTSE look a lot more favourable. Here’s why I think shares are going higher this year.
FTSE 100 shares: economic growth is expected to return
According to the World Bank, the world economy could grow 4% this year, assuming that the Covid-19 vaccine rollout expands as expected.
If economic growth returns, there is the potential for Footsie earnings and dividends to rise as well. Many FTSE 100 companies are in rather economically sensitive sectors such as oil & gas, mining, and financials. Indeed, according to articles from AJ Bell, analysts expect the FTSE 100’s total earnings to grow rather strongly and for those laggard sectors to account for a lot of the FTSE 100’s total profit growth this year. If profits from those laggard sectors grow strongly, there is potential for companies in those sectors to raise their dividends substantially. If that happens, the potential for the FTSE 100’s overall dividend to grow is high.
Sentiment is improving
Another reason why I’m optimistic about the Footsie is that investor sentiment is improving.
Although shares of the index dropped in 2020, the Footsie now is well above the lows of last year. I reckon that rise could have momentum given the fair valuation in many of the index’s components, and the potential for more government stimulus in the US. According to recent new reports, President-elect Joe Biden has a $1.9trn stimulus plan he hopes to enact. If such a huge stimulus passes, there is potential for the US economy to grow faster than estimates. If the US economy grows faster than expected, the world economy could as well. Given that many FTSE components are global, many could also benefit.
There is a lot of optimism over Johnson & Johnson’s potential Covid-19 vaccine. Unlike Pfizer’s vaccine, which requires two separate doses, Johnson & Johnson’s Covid-19 vaccine candidate only requires one dose. With one dose, there is potential for more compliance and more uptake. If the vaccine candidate is approved, there will also be more vaccine supply that could help get the pandemic under control more quickly. If that happens, the world could return to normal faster and sentiment for the Footsie could improve too.
Given that I think FTSE 100 shares will increase this year, I’d buy and hold the Footsie. Despite the poor performance last year, I reckon it’s still a good long-term investment given the index’s exposure to emerging markets and tech advancements.
