Market Update - What’s up with the FTSE 100?
What’s up with the FTSE 100?
Despite some minor hiccups along the way, the major US and European stock indices have soared since the Covid-driven lows hit in March 2020. This year alone we’ve seen a succession of fresh record highs hit by all the major US stock indices, along with the German DAX and French CAC. Most of these indices recovered their pandemic losses and blasted past their previous all-time highs well before the end of 2020. In the case of the tech-heavy NASDAQ 100, the full recovery took a little over 3 months, while the French CAC took a year. But the overall direction of travel was unmistakable. Investors speculated on a quick bounce-back from the economic damage wrought by the pandemic-driven lockdowns. Even troubled Asian Pacific markets have performed well. The Japanese Nikkei hit a record high earlier this year, although domestic issues have seen the index pull back since. But there are some markets closer to home which have been left behind. Perhaps the most significant of these is the UK’s FTSE 100.
As with the indices mentioned above, the FTSE 100 hit a pandemic low in March 2020. But unlike the others, the FTSE’s pre-pandemic high of 7,700 wasn’t a record. The index was trading around 7,900 in May 2018. While it went nowhere after that, the US majors powered on, and were trading at all-time highs just prior to the pandemic-induced sell-off. And as outlined above, while most of the major European and all the US stock indices have recorded a succession of fresh highs this year, the FTSE has underperformed. It managed to break back above resistance around 7,200 in mid-October, finally joining in the widespread rally. But at 7,300 it is more than 5% below its pre-pandemic high. In contrast, the S&P 500 is 40% above its own pre-pandemic high, while the NASDAQ 100 and DAX 40 are up 86% and 22% respectively. This is very disappointing for UK-focused investors.
The UK index has diverged significantly relative to the S&P 500 over the last 20 years, while the divergence between the FTSE 100 and NASDAQ 100 is even more clearly marked. But why should this be? The biggest reason is the difference in constituents. The US stock market was the major beneficiary of the 1990s surge in tech, media and communications followed by the Dotcom boom. Small, innovative, and entrepreneurial start-ups got the backing they needed to become today’s tech giants which make up a significant percentage of all the major indices. By contrast, the FTSE 100 is still dominated by banks, oil producers, mining companies and even tobacco. Just look at how out of fashion these businesses are. With the growth in ESG (Environmental, Social and Governance) investing, many funds are actively divesting their portfolios of oil producers, miners, and anything else not viewed as socially acceptable. These are the stocks that have underperformed for years, while the tech giants have benefited, not just from their attractive products and services, but also by scalability and low interest rates which allow them to borrow cheaply today, in the expectation of more growth tomorrow. Tech accounts for less than 1% of the FTSE 100, but over 27% of the S&P 500.
Could this change?
But perhaps investors shouldn’t rush to dump the FTSE. The UK is still relatively good value compared to the US. The average forward Price/Earnings ratio for FTSE 100 stocks is around 14 while the ratio for the S&P 500 is over 22. In addition, the FTSE contains a stack of good dividend payers. UK dividends surged 61% in the second quarter of 2021, thanks to the vaccine rollout which ended the lockdown. And while the historic dividend yield on the S&P 500 is 1.8%, it comes in at 4.8% for the FTSE 100. The FTSE 100 has a solid representation of defensive stocks, those companies that can make money in bad times as well as good. So, who knows? The next time we have a global slowdown, maybe it will be the dull old FTSE that outperforms the sleek and shiny US indices.