After a strong showing in 2013, where the UK’s leading index made gains of 14%, 2014 was all set to be another strong year for the FTSE 100 (FTSEINDICES: FTSE). However, the index is up less than 1% since the turn of the year, which is a highly disappointing performance. Here’s what’s holding it back.
European Drag
While many of the world’s major economies have shown improvement during 2014, Europe has continued to misfire. Indeed, the latest piece of disappointing news to come out of Europe was a business confidence survey that showed month-on-month declines across Europe for the second consecutive month. Furthermore, the German business climate index (also released this week) posted a fall in Europe’s largest economy — from 110.4 to 109.7 — which was larger than expected. Clearly, Europe has a long way to go before it can convince investors that it is on a clear and stable road to recovery. In the meantime, it appears to be holding the FTSE 100 back.
Psychological Factors
The previous two occasions that the FTSE 100 reached close to 7,000 points, severe crashes followed. The first was the Tech bubble in 2000 and the second was the credit crunch in 2007. So, while many investors would dearly love to see the FTSE 100 break 7,000 for the first time, it appears as though they remember all too well what followed similar levels in the past. The fear and disappointment those two crashes caused may still be felt with many investors and, as such, could be limiting demand for shares at present levels.
Mega Caps
Trading on a price to earnings (P/E) ratio of 14.1 and offering a yield of 3.4%, the FTSE 100 seems to offer good value in a low interest rate environment. That’s at least partly because many of the so-called ‘mega caps’ (companies with large market capitalisations) have not proved to be popular in recent months. They tend to offer less growth potential than their smaller peers and, due to investors seeking growth, have not been demanded as highly as they perhaps should. As a result, they have held the FTSE 100 back, as can be seen when you consider that the FTSE 250 trades on a P/E of 19.2. If the FTSE 100 were to trade on a similar P/E, 7,000 would seem like a very distant memory indeed.
