The last five years have been relatively favourable for investors in the FTSE 100. The UK’s main index has risen by 22% during that time, which works out as an annual return of around 4%. When dividends of around the same level are added, a high-single digit total return has been achieved on an annualised basis.
However, compared to other indices, the returns of the Footsie have been somewhat disappointing. The S&P 500, for example, has risen by 67% during the same time period. This works out as capital growth of nearly 11% per annum plus dividends.
As such, it could be argued that the FTSE 100 has further scope for gains when compared to the S&P 500. In fact, the UK index has a dividend yield of 3.9% at the present time, which is historically high. In contrast, the US index has a yield of around 1.9% right now. This means that the UK index could double in value before yielding even close to its US peer. This suggests that a price level of over 15,000 could be achievable over the long term.
Clearly, rising to such a level seems improbable at the present time. The FTSE 100 is already close to reaching a record high, and it faces risks such as the fallout from Brexit, Eurozone challenges and the prospects of a global trade war.
However, those same risks are likely to affect the S&P 500 to a similar extent, since both indexes are largely made up of international stocks. As a result, they offer representations of the global economy, rather than solely the domestic economy in which they are situated. With that in mind, it becomes more difficult to justify a relatively high price level for the S&P 500 versus the FTSE 100.
In the short term, a weakening of the pound could have a positive impact on the FTSE 100. Brexit talks do not appear to be progressing as quickly as many investors had hoped for, and this could cause uncertainty towards the UK economy to build. A weaker pound may cause positive currency translation benefits for many of the international-focused stocks in the index which report in sterling but mostly trade abroad.
In the long run, the prospects for the global economy continue to be bright despite the aforementioned risks. The chances of a full-blown trade war still seem to be slim. The repercussions are likely to be so severe in terms of a global slowdown that politicians ultimately seek to avoid protectionist policies. And while the Eurozone and Brexit could continue to be threats to growth, favourable monetary policies could mean that the overall performance of the region remains upbeat.
As a result, the FTSE 100 could deliver significant growth over the medium term. A price level of 15,000+ may sound extreme, but if investor sentiment remains bullish then strong gains could be ahead.
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Peter Stephens has no position in any of the 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.