The FTSE 100 is far from the most exciting of stock market bets, and has been for a while, but every dog has its day and the final quarter of the year has a reputation as a time of plenty.
Ol’ Footsie’s dwindling reputation has inspired an article in the august organ that is the Economist, with this weekend’s issue lamenting how the power and influence of the London Stock Exchange’s flagship index has waned:
In 2006 the companies with shares listed in London were worth 10.4% of the global equity market. Today, that figure is 3.6%. London has lagged behind even the laggards: its share of Europe’s total market value has declined from 36% to 22% over the same period. The denizens of the lse that are left look geriatric. Less than one-fiftieth of the ftse 100’s value comes from tech companies, compared with almost 40% of the s&p 500 index of American firms. James Anderson of Baillie Gifford, one of the most successful global investors of the era, recently told the Financial Times that Britain has a 19th-century stockmarket. He is right.
However, while on a performance basis this is not quite fair.
The performance of the FTSE this year has been far from the worst around the world, with a 9.7% rise that far exceeds what an investor would get from just holding savings as cash.
Market commentators say the performance in the year to date is “creditable” and beats the Swiss and Japanese benchmarks and compares very favourably with losses on the year from Hong Kong, China and Brazil.
While it lags the major US indices, with the Dow Jones up 10.6%, the S&P 500 14.7% and Nasdaq 12.1%, as well as those of France and Germany, the gap narrows when considering total returns, with the FTSE100 traditionally offering much higher dividend yields than its Wall Street counterparts, with the current average yield standing at 3.4%.
“One of the factors for the slight underperformance, particularly compared to the S&P and Nasdaq, is the relative lack of technology stocks which have been the focus of investment when growth stocks have been in fashion,” says Richard Hunter, head of markets at Interactive Investor.
“At the same time, the index’s exposure to overseas earnings which account for around 70% of the total, and the US especially, means that the cyclical nature of the FTSE 100’s constituents has been both a blessing and a curse as the fortunes of the world’s largest economy have waxed and waned.”
The FTSE 100’s solid performance owes much to its mix of sectors constituents, says Russ Mould, investment director at AJ Bell.
“It is packed with the unpredictable (miners and oils), indigestible (banks and insurers) and the seemingly interminably slow (plodders such as utilities and also giant drug firms whose recent earnings record is patchy, although the outlook is looking more promising at AstraZeneca).
“This may sound unappealing, but such a mix does mean the UK is a potentially very good play on an inflationary global recovery, since the commodity plays should benefit from higher demand and prices and the banks and insurers may find some comfort in steeper yield curves.”
Owing to some of those in the mix, on valuation grounds the Footsie is still seen as attractive on valuation grounds compared to many of its developed markets rivals, points out Hunter.
A consequence of this is that there has been a flock of international institutional investors buying shares and a general increase in acquisitions by overseas buyers.
The FTSE’s international character means the remainder of the year is likely to see the index impacted by global economic factors, says Hunter, with the potential influence of central bank tapering, slowing growth in China and elevated inflation on both sides of the Atlantic.
As Mould says, “If we remain mired in the low-growth, low-rates, low-inflation funk that has characterised the past decade, the FTSE 100 could again struggle.”
Such an economic environment, as has been seen in recent years, has favoured the tech and biotech stocks which have thrived in the USA but been notably lacking from the FTSE, which Mould says is because investors have proved willing to pay a premium for the secular, trend growth they have offered regardless of what the economic cycle has done.
With stock markets wobbling a little in recent weeks, the next few weeks offer plenty of scheduled events and time for surprises that could provide the catalyst for a downswing or further leg higher for stock markets.
“The imminent third quarter reporting season will add further colour to what has been happening on the ground at company level, given the various outbreaks of the Delta variant and supply chain issues,” says Hunter.
“If markets generally move in to ‘risk on’ mode in the final quarter, there is no reason why the FTSE 100 should not also be drawn along. As ever, the index’s generally mature and cyclical industries will also be affected by the strength of any global economic recovery.”
The FTSE’s valuation attractions could be key in the coming months, where it looks inexpensive relative to its history on an earnings basis and with the dividend yield forecast to rise to a plump 4%.
As such, Mould says, the index “offers a little more downside protection in the event anything goes wrong, unlike say the S&P 500 where investors are paying all-time high multiples for all-time high profits and profit margins at a time when cost pressures are building and those profits and margins could be about to come under pressure.
“The (implicit) assumption that margin and profits will stay at record highs – and go higher – in the US is about to be tested once more.”