So, finally, the FTSE 100 has broken through its 1999 high. What next for this index? Will it breach 7,000?
Well, often, these numbers take on an almost mystical significance. But my view is that you should see the big picture.
You need to see the whole constellation
The FTSE index has had an impressive start to the year, after a disappointing 2014. But you shouldn’t think about how indices like this are progressing from week to week or month to month. Instead of looking through your telescope to observe just one star in the sky, what you should do is zoom out and look at the whole constellation.
The fact that the FTSE 100 is only as high as it was at the turn of the century gives you an idea that shares were incredibly expensive all those years ago, and that now they are rather cheap.
But there are a few things that distort the picture. Notably, the fact that the constituents of the FTSE 100 change from year to year. The number of oil, gas and mining companies has increased a lot over the past decade. This has coincided with the commodities supercycle of the past few years.
Now, in many industries it is worthwhile, and sometimes essential, to follow fashion. But not with investing. The high proportion of FTSE 100 companies that are commodities businesses was a positive during the commodities bull market, but during this bear market it is a negative.
This is the ideal time to invest in the FTSE 100
Another variable is the relative performance of blue chips compared with mid and small caps. Whereas the FTSE 100 has barely moved since 1999, the FTSE 250 (the UK’s mid-cap index) has nearly tripled. Now part of this reflects the higher growth of small companies, but part of this also shows that, over the past few years, small- and mid-cap companies have been favoured over blue chips.
I suspect this means that, over the next decade, the balance will tilt back towards large caps. This is another reason why I think the FTSE 100 looks cheap and is likely to rise over the long term.
Let’s see what’s been happening overseas. The Dow Jones Industrial Average is a whole 57% higher than where it was at the turn of the century. This suggests to me that US markets are rather expensive, and I would generally reduce my investments Stateside.
So my central message is that the FTSE 100 looks cheap compared to many other indices, and that this is the ideal time to invest in a broad range of growing and high-yield UK blue chips that you think will prosper over the next decade, or, if you prefer, to buy a FTSE 100 tracker.
Will the FTSE 100 breach 7000 this year? Well, it may possibly. But whether it does or not is not something I will worry about.
