Why The FTSE 100 May Never Do That Well

It is often said that there is absolutely no link between how well a country’s economy does, and how well its stock market does. To me, this is errant nonsense.

The American century has ended

When historians look back on the twentieth century, they will almost certainly call it the American century.

This was the time when the USA industrialised, making the cars, the airplanes, the consumer goods and, latterly, the technology, that the world wanted. The biggest brands in the world were American brands; this included famous names such as Coca Cola, Boeing and Microsoft.

It is no coincidence that this was the century that saw the US stockmarket boom. The Dow Jones started the twentieth century at 60. It ended it at 11497.

The success of the American economy pulled a Europe which was also industrialising, developing and growing, along with it. The FT30 was one of the earliest UK indexes. It started in 1935 at 100, and ended the century at 4156.

The millennium celebrations in London were lavish, almost beyond compare. The City was booming as the FTSE 100 rocketed, reaching nearly 7000. House prices were also taking off, unemployment was low; the country could do no wrong.

I think America and Europe will always look back on this period as their time. I suspect they will never see the like of it again. Because the twenty-first century will be the century of China and India.

UK companies now have the fight of their lives on their hands

Visit China today and you will see a country which knows that this is its time. The infrastructure, the buildings, the shops, and the services now lead the world. It is an astonishing country.

India, too, is glowing, and I think in years to come it won’t be far behind.

These nations are now building a portfolio of companies which are likely to dominate in future years. Think of Hauwei, Lenovo, Infosys and Tata. With a cost base which is still far lower than the West, new infrastructure, and a young, growing and highly educated workforce, these firms are already starting to beat UK and US businesses all ends up. They are likely to grow revenues and profits rapidly.

That’s not to say that British companies can’t compete. Unilever is perhaps the leading consumer goods firm in the world. AstraZeneca has a dominant position in anti-cancer drugs. And IAG is one of the world’s most profitable airline groups.

But just look at the decline in the country’s financial services industry. A falling oil price has meant that North Sea oil is increasingly unprofitable, and so the share prices of BP and Shell are suffering. And British retail, including famous brands such as Tesco and Sainsbury’s, are under the cosh.

The overall picture is that the profitability of UK companies is stagnating or in decline. And it is profitability which, ultimately, determines share prices.

That’s why, although I am still an investor in British shares, I am being very careful about which firms I will buy into, and am generally avoiding blue chips. My favoured approach is to invest in UK small caps, China and India.

This is not to say that UK plc will always struggle. But it has got the fight of its life on its hands.

When investing in British companies, I always look to buy into small caps. These are businesses which have much more potential for growth and impressive long-term returns. In short, they can make you more money.

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