Over the last 12 months, the FTSE 100 has fallen by 13%. FTSE 100 shares are often from ‘old’ industries such as oil & gas and banking. The UK’s elite index has been left behind by those indexes, such as the S&P 500, that have more exciting, innovative technology companies.
While I want some exposure to that, and indeed have an S&P 500 tracker, I think 2021 could be a year of recovery for the FTSE 100. However, a great deal depends on the virus, the vaccine rollout, and the hopefully resulting economic recovery.
4 reasons that give me optimism
The first reason is value. Value is relative, but in my opinion the FTSE 100 offers plenty of scope for recovery from the pandemic, especially from financials. Low price-to-earnings ratios make me comfortable investing in UK large caps, such as banks and insurers. This provides a potential margin of safety.
As alluded to there could also be a boost in 2021 from shares bouncing back. All the more so if the economy does well as some commentators, and I, think it will do. The flipside, of course, is the economy may not do well and banks and oil & gas and industries that dominate the FTSE 100 may continue to underperform.
I think although there is plenty of innovation out there, many FTSE 100 companies are built on proven business models. I think in most cases, these should endure through the coming years and for decades to come.
Even big companies have some agility and with good management often have the financial resources to move with the times. An example of this is Royal Dutch Shell investing heavily in renewables as its industry changes.
Fourth, with dividends having been cut in 2020, there’s plenty of scope for dividend growth in the coming years. This is something I’m personally very excited about. So I plan to pick up a future passive income on the cheap.
What are the drawbacks of FTSE 100 shares
Despite the cheapness of many FTSE 100 shares there’s a risk it could continue to underperform the US, as it starkly did in 2020. If lockdowns continue to inflate the share prices of technology companies, then investing in that market could be a better option. Also, some investment professionals are arguing emerging markets could have a strong 2020 as the dollar depreciates.
The UK could of course by knocked off course by new strains of the virus that vaccines can’t be adapted to protect against. Technology companies could continue prefer listing in the US over the UK, which could hold back the market. As yet unknown consequences of Brexit could come to the fore, despite recent positive comments from the Barclays CEO. All these could hit the FTSE 100 and consequently the shares of UK large-cap companies.
However, on the balance of things and as I’m based in the UK I plan that a lot of my new investments, cash permitting, will be in FTSE 100 shares.