As we approach the end of Q3, it’s been a pretty awful year for the FTSE 100. At Friday’s close, the blue-chip index stood at 5,843 points, down from 7,542 on 31 December. In other words, the UK’s main market index has fallen around 1,700 points (22.5%) this year. Ouch.
Why is the FTSE 100 so hated?
Looking across the Atlantic, we saw the S&P 500 index at 3,298 points on Friday, having ended 2019 at 3,230. Thus, the main US index is up roughly 2% in 2020. That’s almost 25 percentage points better than the FTSE 100’s performance. USA! USA! USA!
So, what are the causes of this relative – and multi-year – ongoing decline in the performance of the FTSE 100?
1. An absence of go-go tech stocks
Here in the UK, we have very few home-grown tech companies that have expanded to become world leaders. Probably the last great example was Cambridge-based FTSE 100 chip designer ARM, which was bought by Japanese investment group Softback in 2016.
Meanwhile, major US tech firms (such as the so-called FAANGs: Facebook, Amazon, Apple, Netflix and Google parent Alphabet) make up almost a quarter of the S&P 500 by value. Indeed, all of the S&P 500’s gain in 2020 is accounted for by rises in these tech leaders. Strip these out and it would be down by double-digits.
2. Too many old-economy FTSE 100 stocks
Lacking cutting-edge, modern businesses means the FTSE 100 relies on the performance of large, old-economy stocks. For example, these heavyweight sectors include banking and finance, oil & gas explorers and producers, utilities, and telecoms.
Unfortunately, as I warned earlier this year, FTSE 100 mega-caps have performed very poorly this year, especially big banks and oil firms. These giant underachievers have dragged down the FTSE 100 as a whole.
3. A long-term problem
According to theFT, UK investors have been increasingly shunning the FTSE 100 for years. It said “retail investors…withdrew close to £13bn from UK equity funds between January 2016 and this summer.” And it added that the percentage of British retail investors’ assets that were in UK equity funds has dropped by almost two-thirds since 2003.
In short, there’s been a steady decline in UK investors’ exposure to their home country, fuelled by diversification abroad.
What should British investors do?
Our checklist of investor worries is far from complete. Right now, two huge problems loom large. Six more months of social restrictions to curb Covid-19 and the high probability of a no-deal Brexit in just over three months. That’s a major worry for British business. No wonder people are wary of investing in Britain.
However, I see two options for investors. Go with the flow and pump money into already-highly-priced US tech stocks. This works really well – until it doesn’t, as in 2000.
Alternatively, value investors will recognise that there are many unloved and undervalued FTSE 100 stocks. Among these are global leaders that pay attractive dividends, yet whose earnings are cheaply rated. As a lifelong value investor, buying FTSE 100 bargains and holding on tightly is my way to go.
In order words, my advice is to fill up your Stocks and Share ISA with cash and keep this powder dry. When shares in your favourite businesses become cheaper, you can swoop in and get more for your money. Alternatively, you can drip-feed money into the FTSE 100 month by month, so as to average out your buying prices. By doing this, you can avoid buying just before the market swoons!
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.