It’s certainly been an eventful year for the FTSE 100 (INDEXFTSE: UKX). The EU Referendum has perhaps been the biggest talking point, but fears surrounding interest rate rises, the forthcoming US Presidential election and the performance of the Chinese and eurozone economies have caused investor sentiment to remain rather subdued. Despite these problems, the FTSE 100 has risen by over 10% year-to-date. Here are three reasons why more gains lie ahead over the long run.
Loose monetary policy
Since the EU Referendum, the Bank of England has reduced interest rates by 0.25% and has restarted quantitative easing. This adoption of an increasingly loose monetary policy should help to boost the FTSE 100. Lower interest rates should help to stabilise consumer spending in the UK while more quantitative easing should have a positive impact on asset prices.
The Bank of England’s stance is being mirrored across the globe. The Federal Reserve was due to raise interest rates as many as four times in 2016, but has thus far failed to do so. This dovish stance that’s being adopted by central banks should help to improve the prospects for the global economy and for the FTSE 100. Encouragingly, a more hawkish view that would see rates rise is showing little sign of being adopted.
Valuation
The FTSE 100 is trading below its all-time high of 7,100 points. This shows that it could offer upside potential, while its dividend yield of around 3.7% indicates that it offers good value for money.
In fact, when compared to the yield on America’s S&P 500 index, the FTSE 100 offers excellent value for money. That’s because the S&P 500 has a yield of just 2.2%. If the FTSE 100 was to yield the same as its sister index in the US, it would be trading at over 11,600 points. This would represent a gain of 68% over the current level of 6,900 points.
Relative value
As well as being good value on a standalone basis, the FTSE 100 also offers good value for money when compared to other asset classes. For example, the return on cash is less than 1% thanks to recent interest rate falls. Similarly, the yields on gilts and corporate bonds are exceptionally low and may not be enough to provide a real terms return if inflation continues to rise. Meanwhile, property may offer yields of around 4%, but the prospects for the UK housing market are highly challenging and mortgage availability may be constrained in a falling house price market.
Compared to these three assets, the valuation and outlook for shares is hugely positive. Although the FTSE 100 may prove to be highly volatile over the coming months as the US Presidential election and Brexit increase political risk, the valuations, outlook and relative value of the FTSE 100 mean that it should still prove a great place to invest.
