This Key Sector Is Why I’d Buy The FTSE 100 Today

The FTSE 100 has risen by 10.1% so far this year, which doesn’t sound too bad, until you compare it to Germany’s DAX (up 19.4%), Spain’s IBEX 35 (up 15%), the Dow Jones Industrial Average (up 19.8%), and the S&P 500 (up a whopping 23%).

Why has the FTSE underperformed its global peers?

One reason is that the natural resources sector — big oil, gas and mining firms — has not benefited from this year’s stock market rally. The FTSE 100 has an unusually high proportion of large natural resources stocks, and they have held back the index, at a time when other companies have been making strong gains.

Take a look at this table — only one big name, BP, has managed to make any gains this year:

Ticker 2013 YTD performance
BP 14.1%
FTSE 100 10.1%
Royal Dutch Shell -0.9%
Rio Tinto -15.7%
BHP Billiton -16.6%
Anglo American -33.4%

All of the companies in the table, including BP, trade on a forecast P/E of between 8 and 11. That’s cheap by any standards, especially when you consider that the FTSE 100 average forecast P/E is currently 14.5.

What’s more, all of these companies offer prospective yields that are higher than the FTSE 100 average of 3.3%. Shell stock currently boasts a 5.3% prospective yield, while BHP Billiton offers a 4.0% yield. Neither company has cut its dividend payout for at least 15 years.

Index-busting moves

These five companies are among the biggest in the FTSE 100, and collectively account for £530bn of the index’s £1,736bn market capitalisation.

A 15% rise for the five stocks I’ve listed would add 4.6% to the FTSE 100, giving you some idea of the level of influence these natural resources giants have on the UK’s stock market.

Is a re-rating likely?

Commodity stocks have been through the mill over the last couple of years, as investors have revolted against years of over-spending on projects with inadequate returns. However, all of the miners in my table now have new management, and Shell’s CEO is retiring at the end of the year.

Investors have demanded a new focus on profitability and return on investment from all of these companies, and I believe that we will gradually start to see the impact of this in rising earnings and dividends, starting from next year.

As a result, I suspect that 2014 could see a re-rating of the natural resources sector, which could propel the FTSE 100 to new highs.

Can you beat the index with stock-picking?

Of course, some investors have outperformed the FTSE 100 this year by investing directly in stocks like Lloyds Banking Group, which have delivered massive gains.

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> Roland owns shares in Royal Dutch Shell and Rio Tinto, but does not own shares in any of the other companies mentioned in this article.