Should You Really Invest All Your Savings In The FTSE 100 Right Now?

Do you really want to know what is wrong with the FTSE 100 index?

If you haven’t read the story I wrote in early November, I suggest you do so right now. 

In short, I doubt recent trends will materially change in 2015 and beyond, and I would not advise anybody to invest all their savings in the UK’s equity markets.

Trends

The FTSE 100 index has risen 85% since the stock market rally started in March 2009.

Most UK-listed companies, those in the bull camp argue, generate healthy cash flows and their balance sheets carry manageable debts, although sectors such as food retailing, banking and mining have been in restructuring mode for some time. 

The FTSE 100 traded around the levels reported below at the beginning and at the end of each year since 2010.

2010: 5500; 5899 (+7.2% year-on-year)

2011: 5899; 5572 (-5.5%)

2012: 5572; 5925 (+6.3%)

2013: 5925; 6749 (+13.9%)

2014: 6749; 6566 (-2.7%)

You are not impressed, are you? 

Trends don’t dictate strategy, of course, and it doesn’t take an investment guru to realise that companies will have to adopt more aggressive capital-allocation strategies in order to deliver value to their shareholders in future. 

A Big “If”

There is one big caveat: if interest rates actually rise in the UK later than expected, many investors may want to load up on equities over bonds as early as this year. That, in turn, could help stock prices appreciate faster than many observers predict, particularly from the second quarter onwards.

It’s a big “if”, of course.

Oil producers, miners and banks are the main constituents of the FTSE 100, with a combined weighting of almost 40%. They have struggled to deliver decent performances in recent months, to put it mildly. If you want to bet on a fund tracking the FTSE 100, you must be keen to bet on these three sectors at this point in the business cycle.

Risky stuff. It’s time for stock-picking folks… (how may times have you heard that since March 2009?)

Miners And Oil Producers: High Risks, High Returns? 

The commodity cycle suggests more pain ahead for miners and oil producers, although I think it would be a good time to bet on a bounce by adding to your portfolio such names as Glencore, BG, Royal Dutch Shell and BP. I am not a fan of Rio Tinto and BHP Billiton, given their risky iron ore strategy, but I still believe Anglo American could deliver incredible returns as it remains the most likely takeover target in the sector. If you believe the shares of these companies trade around fair value, some 10% of your portfolio may well include a few of these names.  

Banks: High Risks, Low Returns? 

The banks are troubled, and their shares are less appealing than those of major oil and mining players. Specifically, I do not fancy Barclays and Lloyds because their shares are buoyed by very bullish estimates for growth and profits. I’d rather include Royal Bank of Scotland in my portfolio, due to its restructuring potential, as well as Standard Chartered, which could surprise the market over time. HSBC reminds me of a relatively cheap bond, so I’d add exposure, but I’d certainly avoid Banco Santander. 

All that said, bear in mind that portfolio diversification is the one rule of thumb in any investment strategy.