The FTSE 100 has risen by around 30% in the last five years. This is a good performance given that the outlook for the UK and global economies has been somewhat uncertain for most of that time. However, when compared to the S&P 500, which is the equivalent US index, the UK’s main index appears to have been a major disappointment. The US one has risen by three times as much as its UK cousin, which indicates that the UK index could be due for a price rise in future.
What’s puzzling about the divergence in performance between the two indices is that they’re both indicators of global economic health. Although the S&P 500 has a US bias, just as the FTSE 100 has towards the UK, the reality is that they both contain internationally-focused stocks that in many cases have minimal exposure to the economy where they’re listed. As such, the two indices should move in tandem, rather than as they’ve performed in the last five years.
Certainly, the FTSE 100’s exposure to resources companies has held back its performance during the period. The oil price has collapsed, while major mining stocks have been hit hard by falling commodity prices. However, with the S&P 500 containing a significant number of large energy companies, it too has been negatively impacted by a lower oil price in recent years. As such, it fails to explain the differing performance of the two indices.
Uncertainty
In terms of the economic performance of the US and UK, both have been relatively strong when compared to other developed nations. Clearly, the UK has been a less certain place to invest in recent years. The General Election, Scottish referendum and Brexit vote have all contributed to a sense of uncertainty regarding the future direction and identity of the country. This may have put off a number of people from investing in the UK’s main index.
By contrast, the US has been relatively stable in a political sense until the last few months. However, even though Donald Trump promises to effect major change in the country, the S&P 500 has reached all-time highs following the election. Meanwhile, the FTSE 100 remains relatively unpopular, with Brexit seemingly weighing on investors’ minds even though a weaker pound is generally a good thing for international companies that report in sterling.
Looking ahead, it would be unsurprising for the FTSE 100’s performance to catch up to that of its US cousin. Using the dividend yields of the two indices as a guide, it shows that if the UK index had the same yield as the S&P 500 then it would trade at 11,797 points. This would represent a gain of around 76% from the current level and would see the UK’s main index yield fall from the current 3.7% to the S&P 500’s 2.1%.
While such a large gain may seem improbable, share prices can move quicker than many investors expect. Although a 30% gain in the last five years may seem like a decent result right now, the FTSE 100’s future performance could make it look poor in comparison.