It has been a cracking three years for the FTSE 100 index. Prior to this, it was only 16% higher than before the global financial crisis of 2007/08.
Of course, the index has always pumped dividends out, adding significantly to the total return. But compared with the tech-heavy S&P 500, the Footsie’s price return was pretty abysmal until recently.
As such, it had earned plenty of unflattering names, including the ‘Jurassic Park index’ and ‘Sideways index’. I even remember one article calling it something like a ‘nursing home for companies’, due to its old-economy banks, miners, and oil majors. Ouch.
But what a difference the last three years have made. Over this time, the FTSE 100 has kicked into a much higher gear, generating a 13.56% annualised return (which includes reinvested dividends).
To put this in context, it means a £5,000 investment made three years ago in a FTSE 100 index tracker would now be worth roughly £7,320 (net of fees). That’s a significant improvement on previous years.
What has changed?
Looking at the chart, there has been a noticeable jolt higher in the past two years. Off the top of my head, I can think of a few things that might have contributed to this:
- President Trump’s volatile and unpredictable policymaking
- Falling interest rates
- Rotation away from some US growth stocks to UK value stocks
- Surging energy and commodity prices (benefitting oil and mining stocks)
- Bank stocks coming back into fashion
Another powerful trade that has taken hold in the past year or so is a preference for HALO (heavy assets, low obsolescence) stocks. That is companies with tangible assets that aren’t at risk of being made obsolete by artificial intelligence (AI).
So that would be ‘Jurassic Park’-type companies like defence giant BAE Systems (up 52% in two years) and supermarket supremo Tesco (+66%).
Perhaps the ultimate HALO firm is National Grid, the energy transmission monopoly. You can’t disrupt the physical transmission of electricity with a chatbot.
Indeed, a surge in data centres to support AI is likely to make National Grid more relevant than ever. Normally a sleepy stock, it’s now up 34% in the past two years.
Smashed software
The other side of this HALO trade has been software and data companies, which have sold off massively in the last 12 months. These include Rightmove (-39.4%), Autotrader (-38%), Sage (-25.3%), and Experian (-25.6%).
Another is RELX (LSE:REL), which I think is a FTSE 100 stock worth considering. It’s down 33% in the past year.
RELX sells data and analytics tools to professionals, including lawyers, scientists, and banks. The big risk is that new AI models eventually make this data less valuable, potentially reducing customers and eroding pricing power.
However, a recent trading statement stated: “RELX started the year well across all four business areas and has continued to deliver strong underlying revenue and profit growth, and strong new sales.”
Management has consistently said that AI is more of an opportunity than a threat, And its own AI tools are attracting more spending from customers, including on its leading legal research platform LexisNexis.
After its crash, the stock’s trading at just 17 times forward earnings. All 15 City analysts covering RELX rate it as a Buy at 2,678p, with an average price target that’s nearly 30% higher.
