Stating that the FTSE 100 is the best investment on earth may cause a number of investors to question the sanity of the author. After all, its performance in recent years has, on a relative and absolute basis, been very poor. For example, the FTSE 100 has risen by just 11% during the last five years, which works out as annualised growth of just 2.1%; barely above the Bank of England’s inflation target.
However, when comparing the FTSE 100’s performance to other major indices across the globe, things look even worse. For example, the S&P 500 is up by 73% over the same time period, while Germany’s DAX index has risen by 48% in the last five years. Moreover, UK house prices have increased by 23.5% from October 2010 to October 2015, thereby offering far better returns than the UK’s leading index of shares.
While the past may have been hugely disappointing for the FTSE 100, its future is likely to be a lot different. A key reason for this is the make-up of the index. For example, 18% of the FTSE 100 is made up of resources companies. They have endured a torrid time in the last couple of years and are a major reason why the FTSE 100 has posted such a disappointing level of capital gains.
Similarly, financial services account for 21% of the FTSE 100 and, while a number of UK banks saw their share prices rise soon after their initial fall during the credit crunch, in recent years many of them have been massively disappointing as regulatory fines, PPI provisions and general investor apathy have caused market sentiment to decline.
Looking ahead, though, both of these sectors are likely to deliver much improved performance. For resources companies, the future is very bright and emerging economies are set to drive demand for energy 35% higher over the next two and a half decades. While some of this will be from clean sources, oil and other fossil fuels are still set to dominate the make-up of the sector and, as a result, the current low oil price seems unlikely to last over the long term.
Furthermore, with a whole host of financial services companies now generating rising profits and trading on highly appealing valuations, that sector is likely to deliver vastly improved returns in the coming years. The impact on the FTSE 100, therefore, is likely to be very positive and should help it to turn around its disappointing past performance.
In addition, the FTSE 100 remains a very appealing choice for income-seeking investors. It yields around 3.7% at the present time, which compares favourably to the S&P 500’s yield of around 2%. It is also much higher than the yield on residential property, where yields of 5% are rare in southern England and are still to be taxed, account for void periods and factor in maintenance charges.
So, while the FTSE 100 has been a major disappointment in recent years, it appears to offer the perfect mix of income potential, capital growth prospects as well as easily accessible diversification in some of the biggest stocks the world has to offer.
