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What This Earnings Season Tells Us About The FTSE 100’s Prospects

We’re now well into earnings season, so here are a few things you should consider before deciding whether to invest in the FTSE 100 or not. 

Growth & Yield

The FTSE is up 7.3% in the year to date, which is a respectable performance — by comparison, the S&P 500 is up 2.7%, while Germany’s DAX has risen 20%.

In spite of the imminent General Election, the index could gather pace into the second quarter, but the second half of the year will be more challenging, in my view. 

Still, if  you are on the hunt for long-term value, it could be a good time to invest in a cheap UK tracker, although I’d rather build my own portfolio rather than investing in the benchmark. 

There are some strong companies that offer a higher yield and less risk on capital appreciation — and that’s why you could beat the index. 

Premium

The average yield of the FTSE 100 is about 3.4%. Based on metrics such as earnings multiples and historic trends, the index is overpriced by about 15% to 20%. 

I am not concerned about the premium at which the index trades, as I assume it to be implicit in a low-yield environment and the logical consequence of the lower yield offered by alternative, less attractive asset classes. 

But to determine whether the FTSE 100 is investable or not we need to read the signs coming from banks, miners and oil producers — the main constituents of the FTSE 100 — in the current earnings season. 

That Sinking Feeling

Lloyds reports quarterly figures on Friday. It’s worth considering that the quarterly trading update from Barclays on Wednesday did not move the needle.  Its Barclaycard credit card business, in particular, is not living up to expectations. You could blame seasonality, but  either way, that’s bad for Lloyds and Royal Bank of Scotland, whose results are due tomorrow. 

Other banks such as Standard Chartered and HSBC have made the news, but more for their attempt to scare the UK government by raising the issue of where they’ll be based one year from now, than for their solid trading updates — we’ll see how HSBC’s figures look like on 5 May, but Standard Chartered confirmed it’s in restructuring mode. 

Elsewhere, results from TSB and Santander were essentially a non-event. So, based on trading multiples, fundamentals and a zillion of other factors, including dividend risk, most banks look incredibly overvalued and their performances could weigh on the index. 

Oil & Miners

Antofagasta was at the bottom of the blue-chip index, down 2.4% after the copper producer cut is full-year copper output guidance,” MarketWatch noted on Wednesday, adding that the broader mining sector is also under pressure as an official at China’s central bank reportedly said that another round of quantitative easing is not on the cards.

As China’s slowdown continues, you’d have to be very brave or just insane to bet on a bounce back for miners, many of which may have to announce less generous dividend policies as soon as we’re in the second half of 2015 — Rio Tinto anybody? 

Elsewhere, the oil sector is holding up relatively well, as recent results from BP showed — rising oil prices and jumbo deals such as Shell‘s takeover of BG also helped build up confidence and lift valuations. 

Others

Next surprised investors on Wednesday, but I still believe that a short-term bounce won’t prevent medium-term pain — a correction in its equity valuation is overdue, I believe. 

Trading updates from Centrica and British American Tobacco should not have caught you by surprise if you’d read our previous coverage, while AstraZeneca‘s plunge did not come as unexpected, either — or did it?

There are better investments than the FTSE 100 right now, and if you trust my judgment you must also learn more about less volatile and cyclical investment opportunities. Our Fool Team has identified a small number of stocks that still trade well below fair value and are likely to reward you with aggregate capital gains of between 20% and 25% in the next 12 months.

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