The FTSE 100 has experienced a rather volatile 2017 thus far. It has been up by as much as 6% at times this year as it has reached an all-time high. However, it has experienced a pullback in the last couple of months and is now up around 2% since the turn of the year.
Looking ahead, the index could have significant investment potential. Certainly, it may continue to be volatile in future months. However, it could provide a high and growing income return, as well as upbeat capital growth prospects for the long run.
The FTSE 100 currently yields 3.9%. This is 100 basis points ahead of inflation, and therefore it offers a real income return at the present time. A real return could be maintained over a sustained period, since even though inflation is forecast to rise it may not be able to surpass the index’s dividend yield. The Bank of England may seek to raise interest rates to 0.5% in the near term, which could cause inflation to remain at or close to the 3% level over the medium term.
In addition, the dividend payments made by the index’s constituents may increase at a faster pace than inflation. Although the index’s constituents are listed in the UK, they are mostly global in terms of their reach. With the world economy continuing to offer strong growth potential, as well as a continued loose monetary policy on the whole, profitability may remain robust in future years. This may allow companies to pay higher dividends which increase at a rapid rate.
As well as a high potential income return, the FTSE 100 also has capital growth prospects. Although it has reached that all-time high this year, it still trades at a significant discount to its index peer in the US, the S&P 500. The S&P 500 has a dividend yield of around 2%, which suggests that its UK peer could almost double in value and not be expensive in comparison. Clearly, this is unlikely to take place in the short run, but it nevertheless provides an indication of the scale of upside potential which is on offer.
As mentioned, the global economy continues to perform relatively well. Higher spending and lower taxes in the US are yet to be fully put in place and have their intended impact, while China’s relatively high growth rate could act as a positive catalyst on the global GDP growth rate. In Europe, the ECB (European Central Bank) continues to adopt an ultra-loose monetary policy which could provide fertile conditions for growth.
While Brexit is a potential cloud on the horizon, the international make-up of the FTSE 100 means that it could still perform well in the long run. In fact, if sterling remains weak then it may continue to receive a boost from the UK’s decision to leave the EU.
Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.