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Why Is The FTSE 100 Not At A Record High?

FTSE100

Since New Year’s Eve 1999, the FTSE 100 (FTSEINDICES: FTSE) has fallen by 1.5%. Although dividends have softened that blow somewhat, it is still a hugely disappointing result for long-term investors.

Indeed, comparing it to the S&P 500 highlights just how disappointing the performance has been from the leading UK share index because over the same timeframe the S&P 500 is up 33% and is all-set to make record highs in future. Here’s why the FTSE 100 is seemingly stuck in neutral.

The Mega Caps

Poor performance isn’t a problem for all UK indexes. For example, the FTSE 250 is up a whopping 144% in the 21st Century. So, it appears to be a FTSE 100 problem, and a key reason for it lagging behind other indices could be the performance of so-called ‘mega caps’ — the largest stocks in the index by market capitalisation.

The performance of mega caps matters a lot more than the performance of smaller companies when it comes to overall index performance. That’s because the FTSE 100 is a value-weighted index — the bigger the company, the bigger its impact on the index price. So, if the biggest companies experience poor performance, it is likely that the index as a whole will be down — even if the majority of stocks perform well.

A glance at the price to earnings (P/E) ratio of the FTSE 100 shows that it is relatively undervalued when compared to the FTSE 250 and S&P 500. For example, while the FTSE 100 trades on a P/E of 14.2, the FTSE 250 has a P/E of over 19 and the S&P trades on a P/E of over 16. This could mean that there is good value in the FTSE 100 on a relative basis and here are two mega caps that could see their valuations head north in future.

Shell

Despite posting strong gains in 2014 — its shares are currently up over 11% — Shell (LSE: RDSB) (NYSE: RDS.B.US) remains undervalued versus the FTSE 100. It trades on a P/E of 11.6 and continues to offer a greater degree of stability than many of its smaller sector peers. Furthermore, Shell’s strong cash flow means that it can afford a generous dividend. So, with its shares currently yielding 4.4%, there’s yet more evidence that Shell could see increased demand from investors in future. Certainly, profit growth may be minimal in the short run, but Shell’s asset base should provide a reasonable level of growth over the long run.

HSBC

Despite navigating the credit crunch rather more successfully than many of its banking peers (and emerging in better shape), HSBC (LSE: HSBA) (NYSE: HSBC.US) has struggled to gain ground this year. Indeed, its shares are down 8% year-to-date and now trade on a P/E of just 11.2 — well below the index P/E of 14.2. Although the top-line is not set to experience astounding levels of growth, cost-cutting and an efficiency drive should mean that profits grow at a double-digit rate over the next two years. This could attract investors and convince them that HSBC should trade at a higher price level.

Of course, Shell and HSBC aren't the only two FTSE 100 shares with bright futures. That's why the team at The Motley Fool has put together a free and without obligation guide that could help you to unearth some great value stocks for your portfolio.

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Peter owns shares in HSBC and Shell.