2014 has been a major disappointment for most UK investors. That’s because, after the FTSE 100 had a fantastic year in 2013 (closing up nearly 14% for the year), it has made gains of just 1% since the start of 2014. However, the future could be a whole lot brighter for the UK’s main share index and gains of 39% could be around the corner. Here’s why.
Low Valuation
Although it has risen by almost 40% over the last five years, the FTSE 100 continues to offer good value for money. For instance, it remains below its all-time high and is no higher than it was at the turn of the century. Furthermore, its current price to earnings (P/E) ratio of 13.8 is below its long-term average (which, depending on the method used, is generally above 15) and this indicates that there is considerable upside left in the index’s price level.
Improving Prospects
In addition, the future prospects for the UK economy and the FTSE 100’s constituents continues to improve. For example, banking stocks are seeing their profitability improve and are beginning to pay out increasingly higher proportions of profit as a dividend, which could increase demand for their shares. Similarly, mining companies are seeing demand firm up from emerging markets such as China, while sentiment is also on the up for major oil stocks that also make up a considerable proportion of the UK index. So, improving prospects and higher profitability could push the FTSE 100 to higher highs.
Valuation
Further evidence of the FTSE 100’s attractive valuation can be seen in its price level relative to its US counterpart. While the Dow Jones is perhaps the best known US index, the S&P 500 is the most similar to the FTSE 100 since it is market cap weighted and much more diverse than the Dow. Indeed, the S&P 500 trades on a P/E of 19.2, which is a whopping 39% higher than the FTSE 100’s P/E of 13.8. Were the FTSE 100 to trade on the same P/E as the S&P 500, it would currently be sitting at a new record high of around 9,500 points.
Looking Ahead
Certainly, many investors may feel that 9,500 points is unachievable. However, the FTSE 100 is dirt cheap when compared to the S&P 500 all the way up to 9,500 points and so it could be argued that, in time, a rating in the same region as that of the S&P is entirely justifiable. This is especially relevant when the companies listed on both indices have huge crossover when it comes to the regions in which they operate.
Although the FTSE 100 continues to struggle when it comes to breaking through the 7,000 barrier, if it does then the next stop really could be 9,500 points. In that case, a disappointing start to 2014 could soon be well and truly forgotten.