Why It Doesn’t Matter If The FTSE 100 Breaks Through 7,000

Even if the FTSE 100 (INDEXFTSE:UKX) drops to 6,000 points, a few companies could still deliver outstanding returns, argues Alessandro Pasetti.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Outstanding long-term returns can be achieved even if the FTSE 100 doesn’t break through 7,000 points for a long time — even for 10 more years. Here’s why. 

Pay Attention To Economic Moats & Financials

It’s not difficult to identify companies that have strong economic moats — including pricing power, high market share (globally or domestically) and a strong brand, to name a few.

These are important elements that contribute to determine competitive advantages and high entry barriers in any industry. Economic moats must be considered along with the financial strength of any business, which should be gauged by monitoring balance sheets, profit and loss statements, and cash flow statements on a weekly/monthly basis.

Equally important, savvy investors must take into account the composition of the board and corporate governance rules of any investment candidate. 

All the star performers included in this article not only have achieved outstanding returns over time, but are strategically well positioned to continue to deliver solid returns to their shareholders for a few years. 

FTSE vs Value

Investors have been waiting since December 1999 for the FTSE 100 to break through 7,000 points, but stellar returns have been achieved during that period of time even though the main index traded well below 7,000.

Take such global companies such as British American Tobacco (+1,282% since January 2000, excluding dividends), Imperial Tobacco (+867%), Reckitt Benckiser (+867%), Associated British Foods (+854%), SABMiller (+532%), Shire (+523%) and Unilever (+240%). Of course, these companies will come under pressure if the FTSE suddenly drops to, say, 6,000 points, but their long-term prospects would remain intact at the present time. By comparison, and excluding dividends, your performance would be close to zero if you had invested in the FTSE 100 in early 2000. 

Elsewhere, smaller entities such as Next (+1,442%) and Ted Baker (+565%), for instance, carry more risk because their expansion plans may dilute returns, but are similarly attractive. In this context, Tesco (+49%) is a textbook example of a company that has lost focus on its competitive domestic market while pursuing international growth. 

Finally, to the “opportunistic trade” category belong such companies such as ASOS and SuperGroup, while the “high risk/uncertain returns” category includes small caps such as Blinkx, Monitise and Quindell, all of which have little track records, and whose competitive advantage isn’t obvious to me. 

Business Cycle 

At this point in the business cycle, the shares of miners and oil producers are likely to underperform those of companies operating in less cyclical sectors. That’s why they are less appealing in the short term and I would retain only minimal exposure to resources. 

The CRB Commodity Index — a commodity futures price index — trades around its multi-year lows, and could hover around that level for a very long time, based on macroeconomic trends and forecasts. Low interest rates into 2017 and beyond also point to a sluggish business cycle, which has yet to prove it can support the prices of more cyclical stocks over the medium and long term. 

Utilities and banks are not on my wish list, either. 

Europe At A Glance

Europe is troubled, we all know that, but recent figures suggest moderate optimism and this is good news for UK stocks. According to S&P Capital IQ, S&P Euro 350 aggregate consensus earnings per share estimates for 2015 “have improved for all almost all sectors — energy and materials being the exceptions – with double digit earnings growth expected for this year”. 

“Eurozone stocks currently rank among the 30-best performing markets globally in spite of poor growth assumptions.” That shows in retail sales growth, which “has rebounded to 2.8% at year-end 2015 from a low of -3.1% in October of 2012”, with consumer spending improving in Germany, France and Italy among others. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

5 steps to start buying shares with under £500

Learn how this writer would start buying shares with a few hundred pounds in a handful of steps, if he…

Read more »

Young happy white woman loading groceries into the back of her car
Investing Articles

The FTSE 100 offers some great bargains. Is this one?

Our writer digs into one FTSE 100 share that has had a rough 2024 to date, ahead of its interim…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

£9,000 of savings? Here’s my 3-step approach to aim for £1,794 in passive income

Christopher Ruane walks through the practical steps he would take to try and turn £9,000 into a sizeable passive income…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

I’d buy 29,412 shares of this UK dividend stock for £150 a month in passive income

Insiders have been buying this dividend stock, which offers an 8.5% yield. Roland Head explains why he’d choose the shares…

Read more »

Red briefcase with the words Budget HM Treasury embossed in gold
Investing Articles

Could the new UK budget spell growth for these 6 FTSE stocks? I think so!

Mark David Hartley considers six UK stocks that could enjoy growth off the back of new measures announced in the…

Read more »

Investing Articles

With a 6.6% yield, is now the right time to add this income stock to my ISA?

Our writer’s looking to boost his Stocks and Shares ISA. With this in mind, he’s debating whether to buy a…

Read more »

Dividend Shares

This blue-chip FTSE stock just fell 12.5% in a day. Is it time to consider buying?

Smith & Nephew is a well-known, blue-chip FTSE stock with a decent dividend yield. And its share price just dropped…

Read more »

Investing Articles

At 72p, the Vodafone share price looks to be at least 33% undervalued to me

Our writer looks at a number of valuation measures to determine whether the Vodafone share price reflects the fair value…

Read more »