The FTSE 100, which tracks the 100 largest companies listed on the London Stock Exchange, has seen significant fluctuations over the last five years, shaped by global economic forces, domestic political events, and the pandemic's impact. While UK equities had been underperforming relative to other major markets such as the S&P 500 and Stoxx 50, 2023 has marked a turning point, with the FTSE 100 showing signs of resilience and growth. Let's dive deeper into how the FTSE 100 has performed over the last five years, and why it is currently attracting renewed investor interest.
FTSE 100 Performance: 5-Year Overview
What is ftse100? Over the past half-decade, the FTSE 100 has delivered a total annual return of about 6%, trailing behind the 13% of the S&P 500 and the 8% of the Euro Stoxx 50. Much of this underperformance can be attributed to several factors:
Weak Earnings Growth: Key sectors in the UK, such as energy and finance, have faced challenging market conditions.
Political Instability: Brexit and its aftermath led to market volatility and investor hesitancy. Political uncertainties persisted through the UK's handling of the COVID-19 pandemic and domestic policy shifts.
Absence of Major Tech Players: Unlike the US, which has seen explosive growth driven by tech giants like Apple, Amazon, and Google, the UK market lacks a similarly dominant tech sector. This has led to relatively slower growth compared to tech-heavy indices.
However, despite these headwinds, the FTSE 100 has offered certain advantages to long-term investors. The index has historically been known for its strong dividend yield, and companies in sectors such as energy, mining, and finance have been particularly active in returning capital to shareholders through dividends and stock buybacks. This has contributed to a high total shareholder yield, especially in comparison to other global indices like the S&P 500.
2023: A Year of Rebound
2023 has been a pivotal year for the FTSE 100, as UK equities have outperformed several major global asset classes. As of September, the FTSE 100 has risen nearly 7% year-to-date, starting the year at 7,721 points and reaching 8,256 by early September. According to Goldman Sachs Research, the FTSE 100 is projected to rise further, potentially reaching 8,800 within the next 12 months.
One key reason for this strong performance is the attractiveness of UK valuations, which have been relatively low due to years of underperformance and investor skepticism. According to Lindsay Matcham, a sales trader at Goldman Sachs Global Banking & Markets, "Valuations are low, dividend yields are good, and there is less concern around concentration risks." In comparison to global indices nearing all-time highs, the FTSE 100's more modest valuation presents a compelling opportunity for investors looking for diversification.
Factors Behind the 2023 Resilience
Several factors have contributed to the FTSE 100’s resilience this year:
Sectoral Strength: The index's weighting towards sectors such as energy, finance, and mining has helped it perform well amid global inflationary pressures and rising interest rates. Companies in these sectors have been highly cash generative, allowing them to continue paying strong dividends and engage in share buybacks.
Private Equity Demand: With UK stocks trading at a discount compared to other major markets, private equity firms have been actively purchasing UK companies. This has created additional demand for stocks, further supporting the FTSE 100’s price levels.
Inflation and Interest Rate Outlook: Inflation in the UK is starting to moderate, providing the Bank of England with the flexibility to potentially lower interest rates. This could support further economic growth, boosting the outlook for UK equities. Goldman Sachs also expects two rate cuts this year, which could enhance the appeal of UK stocks even more.
The Future of UK Equities: A Diversification Play
One of the main appeals of the FTSE 100, especially in the current market environment, is its diversification benefits. While US equity markets are heavily concentrated in the technology sector, the FTSE 100 offers exposure to other sectors such as energy, finance, and natural resources. These sectors are less susceptible to the same kinds of risks that affect tech-heavy indices, such as trade tensions or regulatory scrutiny around digital monopolies. Additionally, the UK’s equity market has less exposure to tariffs and trade restrictions, making it an appealing option in an increasingly protectionist global economy.
Moreover, several government initiatives could further benefit UK equities. A pension review may lead to increased domestic investment in UK stocks, while policies supporting homebuilding and infrastructure development could stimulate sectors directly tied to the FTSE 100.
Challenges and Opportunities
Despite the recent surge, UK equities still face challenges. The UK economy remains relatively small on the global stage, as evidenced by the shrinking weight of the UK in the MSCI World Index, which has dropped from 5.3% in 2010 to just 2.2% today. Additionally, the absence of large tech companies means the FTSE 100 could continue to underperform relative to more tech-focused indices during periods of rapid technological innovation.
That said, the FTSE 100’s current low valuations, combined with its strong dividend yield and lower concentration risks, make it an attractive option for long-term investors looking to diversify their portfolios. The total shareholder yield for the FTSE 100 is nearly double that of the S&P 500, making it a compelling choice for income-focused investors.
Conclusion
The FTSE 100's performance over the last five years has been a mixed story of underperformance compared to global peers, but 2023 has brought renewed optimism. With UK stocks trading at attractive valuations, strong sectoral performance in energy and finance, and government initiatives potentially boosting investment, the FTSE 100 offers a unique opportunity for diversification in a global portfolio. As Goldman Sachs forecasts a continued rise for the index, investors looking for both value and yield may find UK equities to be a worthwhile consideration.
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