The FTSE 100 is often viewed as being full of old-school stocks without much appeal. Oil, mining, big banks and tobacco feature on many investors’ lists of businesses to avoid.
Many of these companies have a track record of slow growth and come with unwanted baggage. The problem is, these same businesses have also outperformed the market over the last two years.
Double-digit profits
The structure of the FTSE 100 index means that share price movements of larger companies have a bigger impact than those of smaller companies.
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Most of the stocks that have performed best over the last two years have been the biggest companies of all — names such as Shell, Glencore, AstraZeneca and HSBC. As a result, the lead index has outperformed traditional growth markets like the FTSE SmallCap index.
Including dividends, the FTSE 100 has risen by 24% over the last two years. This means that a £2,000 investment in a related tracker in January 2021 would be worth around £2,480 today.
That’s equivalent to an annualised return of 11.4% a year. To put this in context, the average total return from the FTSE over the last 10 years was 6.3% a year.
How did this happen?
Anyone investing in a cheap FTSE 100 index tracker fund could have enjoyed these gains over the last two years. This kind of low-cost investing is a Foolish way to build wealth. It’s also an approach I’m keen on.
Does the FTSE’s improved performance mean that I should give up on stock picking and put all of my cash into an index tracker? Not necessarily, in my view.
I think it’s fair to say that the events of the last two years have created an unusual set of circumstances.
In 2021, demand for oil and gas roared ahead as lockdowns ended and life returned to normal. Shares in companies such as Shell and Glencore bounced back from the depressed levels seen during the pandemic.
In 2022, things changed again. The invasion of Ukraine triggered fears that European countries might run short of energy during the winter. Coal, oil and gas prices went through the roof.
Even before that happened, there were signs that inflation was gathering pace. That led to a series of interest rate rises that saw the Bank of England base rate rise from 0.1% to 3.5% in 12 months.
Rising interest rates are (generally) good news for banks. But they can also slow the economy, triggering a recession. That’s what many market analysts expect to happen in 2023.
Will the FTSE 100 keep on climbing?
Of course, there’s no way to be sure what’s going to happen over the next year or so. Energy prices might spike higher, or fall. Interest rates might go up — or down. Inflation could ease quicker than expect, or not.
In an uncertain world, I think it makes sense to have a chunk of investment cash in a low-cost tracker fund. But I’m not going to give up on stock picking.
Last year was difficult. But with careful research and a clear strategy, I still believe that owning individual shares gives me the opportunity to outperform the wider market on a long-term view. That’s my plan.
