The FTSE 100 is up just 2.7% over five years, making it one of the worst performing indexes globally. And that’s not been positive for UK-based investors who have the majority of their funds in FTSE-listed investments.
It must be said that the FTSE 100 has actually performed better than the FTSE 250. The mid-cap index has fallen by 8% over five years. Excluding dividends, most investors will have found it challenging to make money over the period.
So what’s next?
Underperformance warranted?
There are several reasons why the blue-chip UK index has underperformed over the past five years. These include:
- The UK economy is expected to grow by just 0.6% in 2023, which is the slowest pace in the G7.
- Interest rates are rising, making cash and debt more attractive asset classes in relative terms. This can cause equities to fall.
- The war in Ukraine has caused uncertainty in the global economy, notably in Europe.
- Brexit continues to weigh on investor sentiment.
- The FTSE 100 is low on high-demand tech stocks.
- The cost-of-living crisis has impacted disposable income.
Personally, I think some of these risks have been overplayed. After all, it’s not as if earnings have been suffering greatly, and 70% of FTSE 100 revenue is earned outside the UK.
While all the above factors matter, it’s also the case that UK stocks are suffering from severely negative investor sentiment. In a way, it’s a self-fulfilling prophecy. Investors are increasingly unlikely to put their money into an index that has a poor track record.
By comparison, US stocks are expensive, but investors continue to benefit from positive sentiment around the economy and the market, despite an imperfect relationship between them.
The chart below highlights just how poorly the FTSE 100 and FTSE 250 have performed compared to their global peers over the past five years.
Where next?
The Economic Forecast Agency (EFA) is one of several institutions attempting to forecast the trajectory of the FTSE 100. It’s certainly not easy amid the current economic backdrop when market sentiment is so easily impacted by interest rate commentary.
However, the EFA sees the index climbing over the next 12 months, closing above 8,000 in August 2024. This would mark a sizeable 7.5% increase from the current position. Of course, forecasts can be wrong, but the EFA’s FTSE 100 trajectory is certainly interesting for investors.
It’s worth recognising that UK interest rates will play a major role in the attractiveness of the FTSE 100. When interest rates fall, we will likely see movement away from cash and debt towards equities.
Moreover, while the link between the FTSE 100 and the UK economy is weak, global investors will want to see more evidence that Britain is on the right path post-Brexit. After all, it wouldn’t make sense to invest in stocks denominated in a weakening currency.
