The FTSE 100 is the UK’s largest stock market index. The blue-chip Footsie, created in 1984, tracks the value of 101 of London’s largest companies (one firm has dual-listed shares). Today, the index accounts for the vast majority — roughly four-fifths (80%) — of London’s total market capitalisation.
The FTSE 100: a flop between 2000 and 2021
Launched with an initial starting value of 1,000 points, the FTSE 100 stands at 7,024.35 points as I write late on Friday afternoon. In other words, it has grown to roughly seven times its original worth over 37.5 years. That equates to a CAGR (compound average growth rate) of roughly 5.3% a year. That’s not great, but it’s also not grim. Furthermore, this excludes dividends, which play a big role in the FTSE 100’s total return. Adding in yearly dividends of, say, 4% would bump up the Footsie’s return to a respectable 9.3% a year since 1984.
Now for the bad news. Since Millennium Eve (31 December 1999), the FTSE 100 has essentially gone nowhere. Thus, the index’s greatest returns came in the first 16 years of its existence. That’s because it has traced out a giant W-shape over the past two decades. The first downward leg of my ‘Big W’ happened between December 1999 and March 2003. During this time, the index collapsed by more than half (-52.6%). It crashed from a closing high of 6,930.2 points at end-1999 to a closing low of 3,287 on 12 March 2003.
Then came the rebound leg, which lasted from 12 March 2003 to 15 June 2007. During this bull (rising) market, the FTSE 100 went from 3,287 to 6,732 points, more than doubling (+104.8%). The subsequent crash was during the global financial crisis of 2007-09. At its bottom, the Footsie hit 3,512 on 3 March 2009, crushed by almost half (-47.8%). And the final upwards leg of my Big W runs from March 2009 to the present day. However, this was interrupted by the market meltdown of spring 2020, followed by the index’s bounce-back.
That’s the past. I buy the Footsie’s future today
So, the FTSE 100 has added under 100 points from end-1999 to today. In other words, that’s a capital gain of 1.4% in almost 22 years. That is absolutely awful, making the Footsie an utter flop, dud, and dog in global terms. Hence, the 4% or so a year from yearly cash dividends has been the index’s main return during this century. By any standards, that’s a truly terrible reward for the risky business of investing in shares.
But when all’s said and done, I’m a pretty optimistic chap. When I look at the FTSE 100 today, I don’t see its troubled recent past. What I see is the potential of the index’s best businesses to produce future cash flows, profits, earnings per share, and dividends. Therefore, in terms of its historical returns and international comparisons, the UK’s main market index looks pretty cheap to me nowadays. When I review global markets, I see bubbles almost everywhere: in US stocks, property, bonds, and cryptocurrencies. But when I dig into the Footsie, I see pockets of value popping up left, right, and centre.
Finally, the FTSE 100 as a whole now trades on a forecast 2021 price-to-earnings ratio of 14.7 and an earnings yield of 6.8%. It also offers a forecast 2021 dividend yield of 3.9%. To me, that’s just too cheap right now. Thus, though I worry about the Delta coronavirus variant, slowing economic growth and rising inflation, I’d happily to buy the Footsie at current levels!
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