Plunging US stock markets and Brexit chaos in the UK have come together to drive the FTSE 100 index down. The past week saw it drop below 7,000 and I think it’s worth remembering that the prime London index first broke through the 7,000 level on the way up in March 2015. We could say that the wiggles of the past three years and nine months around 7,000 mean the index has travelled broadly sideways.
Reason 1 – uncertainty
But I’d argue that the firms represented by the index have not seen their business operations move sideways over the period. In many cases, progress has been stellar, so we might expect the FTSE 100 to have done better than it has. Yet all the uncertainty in the macro picture looks like it has been keeping a lid on the valuations of some of Britain’s largest public companies.
If you research some of the companies in the FTSE 100 you’ll find some generous dividend yields, low earnings multiples and healthy-looking forward projections. I think the uncertainty in the air spells opportunity for investors.
Reason 2 – Santa Rally
I don’t know if it will happen this year, but statistically, there is a good chance that shares will rise in the run-up to Christmas and the New Year. I think the recent correction in stock markets sets the FTSE 100 index up well for a bounce-back Santa Rally. It’s only a short-term consideration, but if a Santa rally happens, it will get my new investments in FTSE 100 shares off to a good start, as the under-valuation I think I’m seeing begins to unwind.
Reason 3 – the long-term bet is a good one.
Over the long haul, the total investor returns from shares have outperformed every other major class of asset, such as cash, bonds and property. So, I think it is a good idea to invest in the direction that the prevailing winds are blowing – in shares. The return you get from shares arrives as income from the dividends and from capital gains when the share prices rise over time.
However, the turbocharger for your returns from shares is to reinvest the dividends you get straight back into them, ideally into the shares of the company that paid you the dividends in the first place. If you do that, the reinvested money from the dividends will earn dividends and so on – you’ve started to compound your money and that’s the ‘secret’ to generating wealth.
I think that the stock market hates uncertainty more than it hates anything else and the whole Brexit process is causing a lot of it. But, bit by bit, I reckon the uncertainty will fall away as the country’s future direction becomes clearer. Indeed, the deadline for leaving the EU is 29 March 2019. As we get closer to that date, I reckon share prices could respond well. I’ve been buying individual FTSE 100 shares, but I’d be just as happy to buy a FTSE 100 tracker fund right now that automatically reinvests dividends for a low-hassle approach.