Since its inception in January 1984, the FTSE 100 has endured a life of two halves. In the first half, which lasted until the turn of the century, its price level soared as the dot.com bubble went into full swing and investors across the UK were making handsome returns.
In fact, the FTSE 100 rose from 1,000 points in January 1984 to close the end of 1999 at just over 6,800 points. That equates to an annualised capital gain of 12.7%, which is above and beyond the growth investors expect from the index today.
That’s at least partly because investors have come to see the FTSE 100 as a perennial disappointment due to its performance in the second half of its life. Since the start of the year 2000, the FTSE 100 has fallen by around 700 points as it has been forced to endure a number of major challenges. For example, it experienced the dot.com crash, 9/11, the credit crunch, resources shock and now a slowdown in the world’s second largest economy, China.
Looking ahead, there are more problems on the horizon, with the potential for a Brexit, continued investor fear resulting from additional US interest rate rises, further weakness in China’s GDP growth rate and the prospect of additional difficulties in the Eurozone. As a result, many investors are understandably feeling bearish and may be less than optimistic regarding the FTSE 100’s capital gain prospects for the next decade.
Past performance
However, the same could have been said when the FTSE 100 was born. In each of the previous three years, UK GDP had fallen (with it doing so again in 1984) and the economic outlook for the country was pretty dire. The miners’ strike took hold in 1984-85 and while the mid-to-late-80s saw the Big Bang in the City and the privatisation of numerous publicly-owned businesses, the early 80s hadn’t signalled that a 16-year period of annual share price growth of 12.7% was just around the corner.
In other words, just because the recent past has been disappointing doesn’t necessarily mean that the future will be the same. As such, the FTSE 100 could be on the cusp of huge capital gains and with it trading on a price-to-earnings (P/E) ratio of around 13 and yielding just under 4%, it seems to offer major scope for capital growth in the long run.
Growth ahead?
Were the FTSE 100 to perform in the next decade as it has done since its inception, it would reach a level of 10,700 points by the start of March 2026. That may sound rather optimistic since the FTSE 100 has failed to breach 7,100 points in the past. However, it would only require annual growth of 5.8%, which is very achievable.
Yes, there are short-term problems, but with the US economy strengthening, China offering superb long-term consumer growth prospects and the UK economy offering growth potential, the FTSE 100 may be about to embark on a rather prosperous period.
