With the FTSE 100 trading over 10% lower than it was at the turn of the century, many investors may feel that it’s a poor asset in which to invest. While that may have been true in recent years, investing in shares right now could be a wise move for these three reasons.
Great value
With the FTSE 100 yielding almost 4%, it appears to offer excellent value for money. In fact, this is the highest yield on offer from the UK’s main index since the credit crunch and its capital gain prospects therefore appear to be relatively high.
In order to push the index higher, there are a number of potential catalysts on offer. Notably, the US economy is performing well and while interest rates are expected to rise again this year, their pace of increase is set to be much slower than was anticipated towards the end of last year. As such, it seems likely that the global economy will benefit from a growing US, which should boost the sales and profitability of FTSE 100 incumbents.
Furthermore, with China gradually transitioning towards a consumer focus, there are growth opportunities in the world’s second largest economy. And with the UK benefitting from a continued loose monetary policy environment, the prospects for UK shares seem strong.
Tax advantages
While other asset classes have been the subject of tax increases, shares remain extremely tax-efficient. They can be purchased through a pension where any contributions won’t be subject to income tax, while the annual ISA allowance will be increased to £20k from next year. This should allow most investors to adequately save for retirement using an ISA and with dividends received in an ISA not contributing towards an individual’s taxable income, they remain a sound means for income-seekers and retirees to generate cash flow.
Compare this to buy-to-let, where an additional 3% stamp duty must be paid on purchases that are not a first home and mortgage interest relief will only be available to basic rate taxpayers, and shares start to become much more appealing on a relative basis.
Overvalued peers
On the topic of buy-to-let, the UK housing market appears to be grossly overpriced. The price-to-income ratio is almost as high as it was during the credit crunch and while prices may not suffer a short, sharp decline, it’s difficult to see how they can rise much further. That’s especially the case since interest rate rises are on the horizon and this will hurt demand from first-time buyers, while the aforementioned stamp duty hike is likely to cool interest from investors.
Similarly, bonds lack appeal at a time when a tighter monetary policy is on the horizon, while cash provides a paltry return at the present time.