Look back at the FTSE 100 over the recent past and what do you see? A shocking performance.
The index of top London stocks has lost 10.5% over the past 12 months, and over two years it mellows out only a little to a 4% loss.
What does that say about putting your money into shares, a strategy which has shown a track record stretching back more than a century of beating other forms of investing hands down?
Long term
The Motley Fool’s key lesson is that investing in shares is a long-term approach, and if you’re looking for one-year or two-year returns, it’s not what you should be doing. Having said that, if you include dividends, then the FTSE 100 has made a positive return of around 8% over the past two years, which would still have beaten a cash ISA, but that’s an aside.
Over five years, the FTSE 100 is up 3.4%, but you’d have around another 20% to add in the form of dividends. A total return of approximately 23% is really pretty good, I think, during such an economically troubled period. Maybe it’s not been such a disaster for share investors after all.
It still hasn’t been great, but why do I think 2019 could see the FTSE 100 put in one of its best years in recent times?
Plummeting shares
The valuations of shares have been falling steadily in fundamental terms, and some of our biggest companies have seen their P/E multiples drop to super-low values. Royal Dutch Shell, the biggest company by far, is on a 2019 forecast P/E of 10.4. The second biggest, HSBC Holdings, shows a multiple of 10.7.
To put that into perspective, the long-term average for the FTSE 100 is a lot higher at around 14.
Dividend yields are soaring too. According to AJ Bell’s latest Dividend Dashboard, the FTSE 100 is set to make record dividend payments in 2019 to provide a whopping yield of 4.9%. That’s up from 4.3% in 2018, which was already significantly above the long-term average.
Even better
It also includes all those companies that pay small or no dividends, so if you go for big dividend payers you can get even more — Shell, for example, is down for 6%. And some housebuilders are now on double-digit yields.
Looking back on previous bad spells for the Footsie, they’re pretty much always followed by strong recoveries.
The banking crisis was seriously bad, but from its low point, the FTSE 100 returned more than 45% in total over the next five years. The key thing about such crises is that great companies that are actually unaffected by them are marked down too — so investing in those when they’re cheap can prove a real winner.
Why 2019?
Bringing about a reversal in a Footsie downtrend often requires a trigger, and when the cause of the pessimism is uncertainty, the trigger is likely to be the resolution of that uncertainty.
The current major uncertainty is clearly Brexit. Whether we leave the EU with a deal, without a deal, or maybe not even leave at all, we’d see wildly different outcomes. That uncertainty is going to be resolved in 2019, one way or another.
And here’s the key thing — whatever the outcome, the best companies in the FTSE 100 will hardly even notice. Shell, HSBC, Unilever, GlaxoSmithKline, Diageo, Vodafone… they just don’t care as much as many smaller firms about the UK’s relationship with the EU.