Listening to news headlines about the FTSE 100 (INDEXFTSE: UKX), it seems like every little thing that happens in the world is marked by a tiny change in the value of London’s biggest stock market index.
But much of this daily change is just background noise, and we’d still see regular fluctuations even if we had a spell of no news at all.
It is the longer-term movement of the FTSE that is important for investors and a year is still pretty short-term. But I think it’s relevant that the FTSE 100 has only managed a 1.4% rise over the past 12 months. And over five years, we’re looking at just 14% — the FTSE 250 has risen by 37% over the same period.
Does that suggest the FTSE 100 is undervalued right now? I think it is, and I see dividend yields as an important indicator. I keep a check on AJ Bell’s Dividend Dashboard every quarter, which is based on an aggregate of analysts’ forecasts and provides dividend statistics. The most recent update, for the second quarter of 2018, indicates a forecast dividend yield for the FTSE 100 for 2018 of 4.1%.
That’s above the FTSE’s long-term average, and I grew up on expectations of yields of around 3% to 3.5% from the index. It would take a rise in the FTSE 100 to 8,755 points to get back to the top end of that range. That would be a gain from today’s 7,747 points (at the time of writing) of 13%, and would take the top index closer to the FTSE 250’s gains.
What’s wrong?
Why might the FTSE 100 be undervalued? The obvious candidate is the uncertainty surrounding Brexit. Certainly, positive updates on progress from the stultifying departure negotiations do seem to cause a brief blip upwards, and when the next EU talking head comes along and pours cold water on the progress, we see a dip again.
Having said that, perhaps ironically, negative EU vibes can actually put upwards pressure on the FTSE. If we’re having a bearish day, the pound tends to fall, and as the FTSE is effectively geared to the US dollar (which is the main currency that worldwide investors think in), the FTSE can enjoy some support.
But uncertainty really is the biggest bugbear of the investment world, and among institutional investors it has a big impact. Still, while the spectre of a no-deal Brexit is being talked about more and more, I’m not that pessimistic, and I see the two sides (or is that the 28 sides?) as not being so utterly stupid as to let that happen and damage economies all round.
My optimism concerning politicians might be misplaced, of course, especially in the light of President Trump’s apparent opinion that escalating a trade war with China by imposing a further $200bn in tariffs would actually be good for the USA.
What’s next?
But what could a favourable Brexit deal do for the FTSE? I think the almost certain sterling recovery would dampen any subsequent uptick and the effects would need time to work through. But the sooner the UK economy can dump the uncertainty we’ve faced since that fateful day in June 2016 and get back to business as usual, the sooner I expect to see a new bullish phase for the FTSE 100.
8,000 points by the end of the year, anyone?