Over the last month, the FTSE 100 has risen by around 4%. This has pushed it to a record level and may cause many investors to determine that there is a lack of value on offer within the index.
On the one hand, there may be some truth in this. After all, a number of shares are trading at their highest-ever levels and this could mean they offer a narrow margin of safety. That’s especially the case since an interest rate rise may be ahead. However, there still appear to be a number of large-caps that offer low valuations and growth potential. With inflation moving higher, the income appeal of the index may also offer some support to its future performance.
Interest rates
Much of the FTSE 100’s gains since the EU referendum have come from a weaker pound. Brexit has caused confidence regarding the UK’s economic outlook to deteriorate, and this has meant the pound has weakened significantly. Since many of the index’s constituents are international companies which report in sterling, this has given them a positive currency translation boost that has been reflected in higher valuations as well as improving levels of financial performance.
Looking ahead, though, an interest rate rise may be imminent. Inflation moved to 3% in September and this may force the Bank of England to adopt a less accommodative monetary policy in a bid to curb the rising price level. A higher interest rate could cause the pound to strengthen to some degree, which may mean the gains which the index has benefitted from in recent months subside in the short run. This could push the index downwards even if many of its constituents are performing well on an underlying basis.
Investment opportunity
However, this does not mean that the FTSE 100 should be avoided. There are a number of stocks which still seem to offer excellent value for money for the long term. This is particularly true for income investors, with it being relatively straightforward to generate a 4%, 5% or even 6% dividend yield at the present time. Energy suppliers, telecoms companies, oil and gas stocks and banks all appear to be cheap right now, and this has contributed to the index having a relatively high dividend yield of 3.9%.
Certainly, many companies which are cheap face challenging outlooks. The impact of Brexit on UK-focused companies could be significant, while commodity prices could change significantly in a short space of time. However, for long-term investors there continue to be opportunities to make a million in the FTSE 100. In time, the index appears likely to make new record highs. Its undemanding valuation and the number of investment opportunities on offer mean that even if it experiences a volatile patch as interest rates rise, it could still post strong returns in future.
