With the FTSE 100 having recently reached a new record high, some investors may be concerned that the index is due for a fall. After all, history shows that after every bull market there has always been a bear market. While this may be the case, the index does not yet appear to be running out of steam. In fact, it could rise to 15,000 points in the long run for these three reasons.
A weak pound
The weakness of sterling has been hugely beneficial for the FTSE 100’s performance in the last couple of years. Following the EU referendum, confidence in the UK economy has deteriorated, and this has led to a weak pound. In turn, this has provided a positive currency translation boost to the companies in the index which have international operations, but report in sterling.
Looking ahead, interest rates are expected to remain relatively low over the medium term. The Bank of England made this suggestion very clear when it recently raised interest rates. Therefore, with a loose monetary policy set to remain in place, the pound could remain weak and continue to push the FTSE 100 higher.
Although the index is close to a record high, it still appears to offer good value for money. Evidence of this can be seen in its dividend yield, which stands at around 3.9%. This is towards the upper end of its historic range, and suggests that the index could have room to move higher.
Part of the reason for its high dividend yield is the fact that a number of its largest constituents appear to be relatively cheap at the moment. Many of them operate in sectors which have not been particularly popular in recent years, and therefore their valuations have not risen in line with some of their index peers. For example, FTSE 100 banking shares and oil and gas companies appear to offer good value for money at the present time. Should investors become more bullish on their outlooks, it could have a major impact on the index’s price level.
While the FTSE 100 has a dividend yield of 3.9%, its equivalent index in the US has a yield of just half that level. The S&P 500’s dividend yield of 1.9% shows that the UK’s main index may be undervalued on a relative basis. In fact, if it was to have the same dividend yield as the S&P 500, it would lead to a price level of 15,000 points for the FTSE 100.
Clearly, this level is unlikely to be achieved in the near term. However, it appears to have the potential to do so over the long run. As such, while it may be trading close to record levels, there still appears to be significant upside potential ahead. This could make the FTSE 100 an attractive place to invest for the long run.
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