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Here’s how I’d invest £1,000 in an ISA to beat the FTSE 100 in 2020

The FTSE 100’s performance in 2019 was stunning. The index recorded a rise of 12% during the calendar year. When its dividend is added to that figure, the FTSE 100’s total return for the year was around 16%. That’s almost twice as much as its annualised total return since inception, and shows that many investors will have enjoyed a profitable 2019.

Looking ahead, the index continues to offer good value for money in many instances. Alongside this, there appears to be strong growth potential for companies operating within the UK and in international markets. By focusing on such companies, it may be possible for you to beat the index in 2020 and generate high returns within a tax-efficient product such as a Stocks and Shares ISA.

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Low valuations

Despite its strong rise in 2019 and the bull market experienced over the past decade, the FTSE 100 continues to offer good value for money. For example, the index has a dividend yield of 4.4% at the present time. This is much higher than its historic average, and suggests that the index could offer further capital growth potential over the medium term.

Additionally, many of the index’s members currently trade on low valuations compared to their historic averages. This may be because of the uncertainty that has surrounded the UK and world economies in recent months. In many cases, stocks with low valuations have bright growth prospects that could mean investors have priced-in the risks they face. For long-term investors, this could present numerous buying opportunities that enable them to improve the risk/reward ratio of their portfolios.

Growth potential

Although the UK economy faces continued political uncertainty in 2020, it is expected to deliver relatively encouraging performance compared to 2019. For example, GDP growth is forecast to be similar to last year, while data such as unemployment figures and wage growth could prove to be more robust than many investors are anticipating. This could mean that those FTSE 100 companies that have exposure to the local economy deliver bottom-line growth that merits a higher share price level.

Similarly, the global economic outlook could prove to be relatively positive. The world economy is expected to grow at a faster pace in 2020 than in 2019. Since many of the FTSE 100’s members have exposure to fast-growing economies such as India and China, they could benefit from rising demand for their products and services over the next 12 months.

Outlook

The FTSE 100 could deliver further impressive capital growth in 2020. Through purchasing those large-cap shares that trade on low valuations and that have exposure to fast-growing economies, it may be possible for you to outperform the wider index. In doing so, you may be able to improve your financial future – especially when investing through a tax-efficient product such as a Stocks and Shares ISA.

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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.