The performance of the FTSE 100 has been volatile in the last year. It has traded as high as 7,877 points and as low as 6,584 points during that time. Despite this, it trades at roughly the same level as it did 12 months ago, which is clearly disappointing for investors.
Looking ahead, the FTSE 100’s performance could improve. The index appears to offer a number of good value stocks, while its international exposure may help to reduce its overall risk. And with equities appearing to have superior risk/reward ratios compared to other assets, now could be the right time to buy into the UK’s main index.
Valuation
Having made minimal gains in the last year, the FTSE 100 could now offer better value for money than it did a year ago. Even at its height in 2018, though, the index was just under 15% higher than the level at which it closed the 20th century. This suggests that as well as being overpriced nearly 20 years ago, the index may be undervalued today.
A dividend yield of around 4.3% provides evidence of its margin of safety. Indeed, it is possible to find a number of FTSE 100 shares that offer price-to-earnings (P/E) ratios of less than 10 at the present time. Others offer dividend yields of 5% or above, which indicates that value investors may be drawn to the index over a long-term time period.
Geographical exposure
With the UK political outlook being extremely uncertain, it may be prudent to invest in companies which have exposure to international markets. With Brexit yet to take place and there being a lack of a clear plan according to recent updates, the political situation could deteriorate – especially with various MPs having resigned from the Labour and Conservative parties in recent days.
The FTSE 100’s international bias, in terms of most of its incumbents’ earnings being derived from outside the UK, could therefore become increasingly appealing. Although there may be a number of buying opportunities among UK-focused shares at the present time, the UK’s main index may offer investors the opportunity to diversify during what could be a period of uncertainty for the wider economy.
Relative appeal
While the global economy may face risks such as a slowing China and increasingly protectionist trade policies, the appeal of equities relative to other assets remains high. Property investment could decline in popularity as increasing taxes and rising interest rates hurt profitability for buy-to-let investors. Bond prices are also likely to be affected by rising interest rates, while cash ISAs are currently unable to offer a positive real-terms return.
As such, while the FTSE 100 carries risks, its overall risk-return ratio appears to be appealing on a relative basis. Therefore, now could be the right time to buy a range of large-cap stocks at low prices for the long term.