UK markets open in 5 hours

Technology! Why I’d consider buying the FTSE 100

Jay Yao
·3-min read
Screen of price moves in the FTSE 100
Screen of price moves in the FTSE 100

The FTSE 100 hasn’t surged over the past five years like some stocks have.

In fact, the FTSE 100 has been very close to flat over the last five years.

While the index traded for around 6,334 on 20 November, 2015, it traded around 6,334 on 19 November 2020. Despite the relatively tepid performance, I’d nevertheless consider buying the FTSE 100 due to its exposure to technology advancements.

FTSE 100: Riding tech advancements

In the coming years, many economists expect technology to help the economy grow substantially. I think this could benefit the FTSE 100.

Of all the technologies that have promise, 5G and AI are potentially among the most transformative.

5G allows for much faster potential wireless network speeds as well as more potential wireless bandwidth. With more bandwidth, wireless networks could handle more connected devices.

AI can allow computers to learn from experience to make decisions and do various tasks. Over time, analysts expect AI to become more advanced. As AI becomes more advanced, many expect the combination of 5G and AI to unlock many new technologies and services that could increase economic output substantially.

Indeed, according to ABIresearch, the direct/indirect/combined output of 5G and AI to the global economy could reach $0.55tn next year, $3.11tn annually in 2025 and as much as $17.9tn annually in 2035.

Although the FTSE 100 doesn’t have many information technology companies that could benefit directly from the AI/5G combination, the index can still benefit in other ways.

According to ABIresearch, 36% of the benefit of 5G/AI technologies is expected to be productivity-related in 2025. Even better, the research firm expects 64% of the benefit of 5G/AI to be productivity-related in 2035 when the pie will likely be much bigger.

If companies are more productive with 5G/AI, I think their earnings could be higher. If many FTSE 100 company earnings are higher, I think the overall index could also be higher.

With more earnings, I think many FTSE 100 companies can also pay more dividends.

Economic benefits due to a potential Covid-19 vaccine

I think the rapid development of potential Covid-19 vaccines is another example of how technology has advanced quickly and how technology has a lot of potential to help the economy. I also think Covid-19 vaccines, if approved, could help the FTSE 100.

Technology has advanced fairly rapidly. Before Covid-19, the discovery and research phase of vaccine development normally took around two to five years. With the pandemic, however, the total time to develop a potential Covid-19 vaccine could take less than a year.

Thanks to advancements such as powerful computer-based analysis of various interactions, scientists working on Covid-19 vaccine candidates are more productive and are able to come up with a potential working solution faster. Thanks to mRNA tech, Pfizer and Moderna each have a potential shot at approval for their vaccine candidates.

Technology also has the potential to boost the economy. If the world has a Covid-19 vaccine that is safe and effective, the world economy can begin to normalize. With the economic normalisation process could come more growth.

Indeed, according to an AJ Bell report, analysts expect the adjusted net profits of the FTSE 100 to rise by around 47% next year.

The post Technology! Why I’d consider buying the FTSE 100 appeared first on The Motley Fool UK.

More reading

Jay Yao 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.

Motley Fool UK 2020