Today’s high interest rates are starting to make a Cash ISA look a bit more attractive. Some are offering as much as 4% for a fixed one-year term. I really can see why investors might go for that, rather than take a risk on FTSE 100 stocks.
I mean, recession is very likely, and the world economy looks uncertain. The attraction of a safe, tax-efficient, 4% return in such times is clear. For those who really want to minimise risk, it’s almost a no-brainer, isn’t it?
Well, I think right now could be a great time to put money into a FTSE 100 Stocks and Shares ISA instead. I’ll explain why.
FTSE 8,000
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The Footsie finally broke through 8,000 points in February, creating an all-time high. But it didn’t hang on to it, and quickly fell back. This is at a time when a lot of top UK stocks look like very good long-term value to me.
A bullish decade ahead?
The FTSE 100 is up 20% in the past decade. And I reckon 10 years ago was an especially good time to buy too. But it’s all been part of a very erratic century so far for UK stocks. Since the end of 1999, we’ve seen a rise of only around 15%.
UK economic production in 2020 was a full 85% higher than in 1999. Yet the companies generating it are worth only 15% more today.
Shares were hammered during the pandemic, but the risk was a lot higher then. And I reckon the outlook now for UK company earnings is the best it’s been for some time. We might just be on the verge of a new bull run.
Soaring dividends
I’d say the undervaluation also shows in dividends. In 2018, FTSE 100 companies paid out a total of £85.2bn in dividends. That’s more than the economy of Bulgaria.
The annual cash bonanza was dented a bit by the pandemic, but not by much. And 2023 forecasts already indicate another new all-time record. Analysts predict a bumper payout of £85.8bn this year. Does that sound like a stock market to be fearful of?
Should we shun the opportunity to snag a lifetime of passive income from UK dividends? And go for the 4% we could get from a Cash ISA instead, a return that’s certain to fall when interest rates decline again? That’s not for me.
Best value
In summary, I think lead index stocks are the most attractive they’ve been for a good few years. Many individual valuations are super-low, and dividends are high and climbing.
The combination of high interest rates and economic fear has driven a lot of money away from the stock market and into a Cash ISA and gold. And that helps keep shares cheap.
If an investor asks me what’s best time to invest in a Stocks and Shares ISA, I’ll always say now. That’s because I think the UK stock market is the best vehicle for getting rich in the long term. But sometimes it just seems more tempting than usual. This could be one of those times.
