Where will the FTSE 100 finish 2023?

After hitting record highs in February, the FTSE 100 is down around 1% over six months and one year. But what’s coming in the final month of 2023?

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It’s been yet another weak year for the FTSE 100 index. Since 30 December 2022, it has lost 0.3% of its value. Across the Atlantic, the S&P 500 index has leapt by 19% this calendar year, while the STOXX Europe 600 index has gained 8.1%.

The FTSE 100 flops again

After limping through another year of insipid performance, no wonder global investors are losing interest in UK shares. Why risk money on feeble Footsie stocks, when the thrills and spills of US equities are a mouse click away?

Here’s how the UK’s main market index has performed over four other timescales:

One month+1.4%
Six months-1.2%
One year-1.1%
Five years+6.4%

What a pitiful performance by Britain’s blue-chip index. After recording similar losses over six months and one year, it has eked out a meagre gain of 1.2% a year over the past half-decade.

However, the above figures exclude cash dividends — one reason I’ve been hoovering up large-cap UK stocks. Currently, the FTSE 100 offers a cash yield of 4% a year — well ahead of other major stock-market indexes.

Adding five years of dividends at 4% a year boosts the index’s capital return to around 26.4%. This works out at a compound return of 4.8% a year. While this hardly life-changing, it’s better than nothing.

What next for the Footsie?

My 37 years of investing experience has taught me that making short-term predictions about the direction of asset prices is a mug’s game. To me, predicting the future path of share prices is a fool’s errand (note the small ‘f’).

That said, with the FTSE 100 currently hovering around 7,428.93 points, I’d expect it to end the year within 250 points either side of this mark. That works out to a near-3.4% swing either way — well within the London market’s usual monthly movements.

Thus, I’d expect the index to end 2023 somewhere between 7,178.93 and 7,678.93 points. This is largely within its 52-week range of 7,206.82 to 8,047.06 points. That said, I’d be surprised if the Footsie dropped towards the low end of this scale, given its current undervaluation.

London looks lovely to me

Furthermore, the optimist in me must point out the crazy valuation of the London stock market. The Footsie trades on an earnings multiple of 10.9 times, producing an earnings yield of 9.2% a year. This means that the index’s dividend yield of 4% a year is covered a decent 2.3 times by earnings.

Rarely have I ever seen London-listed shares trading at such lowly levels, except during the depths of the 2000-03, 2007-09, and March 2020 market meltdowns. Therefore, buying this unloved index and many of its constituent stocks looks a smart move to me.

Lastly, the UK index has trailed its global counterparts for so long that it appears to be a value trap. Nevertheless, given its lowly fundamentals, I’m expecting better returns from the FTSE 100 over the next five years!

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