April 1998 may not have been a particularly significant month for you or for most investors. But, for the FTSE 100, it was the first time in its fourteen year history that it had reached the 6,000 points level. And, less than three months later, it reached exactly the same level as that traded at today – 6,174 points.
Furthermore, the economic world was not all that different back then. For example, there were concerns surrounding the future prospects for the Asian economy, with the ‘Asian Crisis’ of 1997 causing doubts about the sustainability of China and the rest of the region’s growth rate. In addition, the US and UK economies were performing relatively well, with both of them having recovered somewhat following the recession of the early 1990s.
Of course, while the lack of growth in the FTSE 100 since 1998 is disappointing for buyers of the index back then, it is somewhat impressive that the index has been able to recover so strongly from the challenges of the bursting of the dot.com bubble, 9/11 and, in particular, the credit crunch. And, while a high of 7,100 points was reached earlier this year, in recent months the FTSE 100 has lost 1,000 points due to concerns regarding the global growth outlook.
Clearly, doubts regarding China could be well-founded. The world’s second-largest economy could be headed for a harder landing than many economists had predicted, with demand for resources, consumer goods and services falling in the coming months and years. Likewise, the impact of rising interest rates in the coming years may hurt the growth rates of developed countries such as the US and UK, thereby putting pressure on the earnings of companies listed in the FTSE 100.
Were this to occur, the FTSE 100 would be unlikely to make much headway and, realistically, could fluctuate around its current level over the medium to long term.
Similarly, the present challenges faced by China may prove to be temporary and the country could feasibly make a successful transition to a consumer-led economy, thereby maintaining (and potentially increasing) demand for a wide range of products. And, even though interest rate rises in the developed world will not stimulate the FTSE 100, it is clear that monetary policy tightening will not take place at a rapid rate and, more importantly, will only be undertaken as and when the economy is deemed to be ready for it.
Under this scenario, it seems likely that further upbeat economic growth numbers are more likely, which could have a positive impact on the FTSE 100’s price level.
While the global economic outlook is uncertain, this is merely a fact of life for investors. In other words, the global economy is, by its very nature, highly unpredictable. However, an indication that now could be a good time to buy shares in the index is given via the FTSE 100’s dividend yield.
This is useful because it provides an indication of the financial health and optimism of companies within the index and also takes into account the price level of the index, thereby providing a guide as to whether now is the right time to buy. And, while the FTSE 100’s yield peaked at almost 5.5% in 2008/09, the outlook back then was far more uncertain than it is today. As such, the current yield of just under 4% (which is almost double the 2.1% level from 1998) indicates that the FTSE 100 offers excellent value for money at the present time.
Certainly, risks to growth remain and the FTSE 100 has disappointed over the last seventeen years. But as its yield shows, it is in a far healthier and better value state than it has been at any point since 1998, with its outlook also indicating that, bumps in the road aside, its progress is likely to be much more impressive in future than it has been in the past.
