I’ve suggested that the FTSE 100 could be set for a record 2019, but I really wasn’t expecting it to start the year with such a bang.
After a 12% fall in 2018 (with the FTSE 250 losing 15% too), we’ve seen a storming recovery since the New Year of a shade short of 10%.
Obviously it’s way too early to guess at how the Footise will end the year (especially as it had a reasonable first half last year before plunging), but I’m seeing consistent signs that UK shares as a whole are significantly undervalued.
Gloom
First off, you really don’t need to be an investment expert to see how pessimistic people are feeling about the economy and about UK shares now, especially as the Brexit-related storm clouds have been gathering. And whenever emotion is driving people’s attitudes to shares, in my experience it’s always overdone.
So when markets are down due to people feeling gloomy, it’s very likely that they’re too far down.
Strong companies
That’s supported by the actual fundamental performance of our companies. Looking at our very biggest listed firm, Royal Dutch Shell, we’ve seen a solid recovery from the oil price slump, with forecasts for strong earnings growth plus big dividends to follow.
Unilever is the second biggest in the FTSE 100, and it’s just been carrying on with its decades long record of steady growth in earnings and dividends.
Next biggest is HSBC Holdings, which has been through a downturn. But since 2016, the Asia-focused bank has been seeing a sharp recovery in earnings, its dividends are yielding 6% and better, and the shares are trading on low P/E valuations.
That’s pretty much the general picture for many FTSE 100 companies these days — decent performance, low valuations, and strong dividends. And dividends for me are the true measure of the Footsie’s undervaluation, with overall yields from the index steadily climbing.
Great dividends
I’ve been following AJ Bell’s quarterly Dividend Dashboard, which tracks forecast yields (among other measures). At the back end of 2016, I thought forecasts of a total yield for 2017 of 4.2% were remarkable and indicated an undervalued market. It’s not that many years ago that I looked on yields of around 3% to 3.5% as being about par for the index.
And things have just got steadily better and better.
While the FTSE 100 has stagnated since then, yields continue to rise. In fact, the latest Dashboard from the final quarter of 2018 shows forecasts for 2019 dividends having soared to a whopping 4.9%. With inflation running at around 2% and cash ISA accounts struggling to get close to 1.5% in interest rates, that looks like a serious disjoint with reality.
Millionaire
Now, you’re unlikely to make a million in just a year, but listen to this…
One of my favourite bits of investing statistics is that if you’d invested £1,000 in the UK stock market in 1945 and reinvested all your dividends, according to the Barclays’ Equity Gilt Study, it would have grown to £1.8m over the next 60 years, even taking inflation into account.
I say make the most of the FTSE 100’s weakness while you still can.