Why The FTSE 100 Could Surpass 7,000 Points By October

BritainWith the S&P 500 hitting record highs in 2014, it’s been disappointing to see that the FTSE 100 has failed to surpass the 7,000 level. Indeed, the S&P 500 is now 37% higher than it was at the turn of the century, while the FTSE 100 has risen by just 7% over the same time period. However, the FTSE 100 could prove to be the better performer moving forward and could push past the key, psychological 7,000 points level before October. Here’s why.

Valuation Differences

On the face of it, the FTSE 100 is dirt cheap. That’s because, while the S&P 500 trades on a P/E ratio of 19, the FTSE 100’s P/E is just 13.7. That’s 28% lower than the S&P 500’s current rating and, although the US economy has arguably emerged a little quicker from the credit crunch, the UK economy is now performing well and is among the fastest growing economies in the developed world.

Crossover In Exposure

Of course, the majority of companies listed on the FTSE 100 do not rely on the UK for the bulk of their earnings. This makes the current valuation gap between the S&P 500 and the FTSE 100 even more difficult to explain. For instance, mining stocks such as Rio Tinto and BHP Billiton (that are listed on the FTSE 100) have little — if any — exposure to the UK economy, with their share prices being dependent upon the price of iron ore and demand from China to a far greater extent that the performance of the UK economy.

Similarly, most US stocks are dependent upon the global economy rather than solely the US economy for their earnings. So, with there being significant crossover between the operations of companies listed in the US and UK, there should be only a negligible difference in the values of the two indices.

A Psychological Barrier

One reason for the FTSE 100’s lacklustre performance is psychology. When the FTSE 100 gets close to unchartered territory, investors sell. However, there could be an event that produces such a relief among investors that the index surpasses 7,000 points without too much thought.

That event is, of course, the Scottish referendum. If Scots vote ‘no’ there is bound to be an uplift of some sort in the short run as investors react positively to less uncertainty and push the FTSE 100 past 7,000 points. Similarly, a ‘yes’ vote is likely to cause a correction over the coming weeks and months but, crucially, does not mean that the long-term potential of the FTSE 100 is any less attractive.

Indeed, however Scotland votes, the FTSE 100 seems to be at a very attractive level right now. As such, it could be well worth taking advantage of uncertainty and adding to your portfolio. So, which stocks should you buy, and why?

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Peter Stephens owns shares in BHP Billiton. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.