Having endured a hugely disappointing 2018, the FTSE 100 has recorded a gain of around 9% since the start of 2019. That’s a strong performance considering the first quarter of the year isn’t yet over, and could signal investors are feeling increasingly optimistic about prospects for the world economy.
Even after its rise, the FTSE 100 continues to trade only slightly higher than it did at the start of the century. Back then, there was huge optimism for what the 21st century could bring. While that may yet to be fulfilled, with the index experiencing a difficult 19 years, could now be the perfect time to buy into the FTSE 100?
Valuation
Since the FTSE 100 trades only 6% higher than it did at the end of 1999, it could be argued it offers good value for money. Of course, 19 years ago the index was grossly overvalued. It was in the midst of the dot com bubble, which led to a variety of stocks being valued based on potential sales despite having no track record of revenue.
Today, though, the index seems to be very cheap. It has a dividend yield of around 4.2%, which suggests it offers a margin of safety. Although its yield has been higher than its current level at other times during the century, this has usually been during a bear market where the prospect of dividends being paid has appeared to be somewhat low. Today, despite risks facing the world economy, the index’s constituents appear to be well-placed to deliver dividend growth over the medium term.
Therefore, from a value perspective in terms of price and its future prospects, the index could have significant appeal after what has been a mixed period.
Outlook
While Brexit may be dominating newspaper headlines in the UK, the FTSE 100’s future may be more closely linked to the performance of the world economy. As an internationally-focused index, the pace of growth in countries such as China and the US could impact on its prospects to a significant degree. With both countries performing well from an economic perspective, despite risks from a rising US interest rate and increasing protectionism, the FTSE 100 could enjoy a tailwind over the long run that makes its present-day valuation seem cheap.
Certainly, there’s scope to experience a return to 2018’s declines. However, with a number of its incumbents appearing to have wide margins of safety, there may be a value investing opportunity on offer for investors who adopt a long-term focus. Doing so may enable them to benefit from the long-term growth trends of the world economy, while diversifying among a range of large-cap shares that operate in a variety of sectors.
As such, buying into the index now could be a shrewd move, with it appearing to offer better value for money given its outlook than it has done for over two decades.
