Keep calm and carry on: why I’m buying the FTSE 100 after its recent decline

It is a tough time to be an investor right now. Even a quick glance at the business pages of any newspaper will tell you that threats to the global economy are brewing. 

Donald Trump’s trade tariffs have sparked a full-blown trade war with China. Europe is struggling with an economic downturn, which could evolve into a continent-wide recession. Across Africa and South America, political and economic troubles are growing, undermining stability, and the UK is staring down the barrel of a no-deal Brexit at the end of October.

Considering all of the above, it is no surprise that the FTSE 100 has slumped during the past few weeks. Since the end of July, the UK’s leading stock index is down by around 5%. Its year-to-date performance is substantially worse compared to other international indexes. For example, compared to the S&P 500, the FTSE 100 has underperformed by around 10% this year. 

I believe the best course of action for investors in this environment is to keep calm and keep buying the FTSE 100. 

Look to the long term

While the FTSE 100 is a UK-based index, its returns are more connected to global growth. More than 70% of FTSE 100 companies’ profits come from outside the UK. So, investing in the index is more of an investment in the global economy than the UK.

And while the shadow of the US-China trade war is hanging over the global economy today, I do not think it is unreasonable to say that five or 10 years from now the world economy will be bigger than it is now. 

Indeed, during the past 10 years, the global economy has grown at an average annual rate of between 2.5% and 4.4%, that’s despite the overhang of the global financial crisis. 

If the economy can grow at this pace while shaking off such a severe economic depression, then I do not think it is unreasonable to assume that the world economy will continue to grow at a steady rate over the next 10 years as the trade war rumbles on.

Attractive return 

So, what sort of performance should investors expect over the next 10 years from the FTSE 100?

Well, over the past decade, the index has produced an average annual return for investors in the region of 8%, that’s including dividends and capital growth. We could see the same sort of returns over the next decade. 

If we assume that company earnings grow in line with global GDP growth — 2.5% per annum based on historical trends — and the FTSE 100 dividend yield of 4.7% remains unchanged, there’s a strong argument to be made that the index could provide a total return for investors of around 7.2% per annum going forward. This is only a rough, back of the envelope calculation, but I think its shows clearly why the FTSE 100 remains an excellent investment even after recent declines. 

That’s why I’m still buying the index despite recent market turbulence.