The FTSE 100, the "British S&P 500", has been on my radar for a while. I perhaps have some bias here as I'm a Brit based on the the U.S. (I feel I should disclose this), but I want to outline why I think it's a good time to invest if you're looking for more international exposure.
I'm not going to sell this as an investment that'll get you 10x your return anytime soon, but I do think there are arguments it should be a "buy" as there are signs its going to have a good year. Over the next year I'm hoping for a return of above 10% inc. dividends and hopefully closer to 15% assuming no market crash.
Composition
Details of the FTSE 100 composition can be found here. A sector-by-sector analysis can be found here.
Over the past decade the FTSE has been dragged down due, in part, to high exposure to mining and materials stock. However, there are signs these companies are making a come-back after a decade of low growth. Energy companies are an exception to this due to the drop in oil prices. However, the two big players in the UK energy space are BP and Shell. Both have committed to phase out oil production by 2050 and are shifting towards being providers of alternative, clean energy. They are using their oil revenue to pivot moreso in this space.
The FTSE is also weighted towards financial services and pharma stocks. Pharma is obviously a hot sector right now, but 2021 is predicted, by some, to be a great year for the banking industry.
The FTSE is lacking in tech stocks (also hot right now), but this may be viewed as a good thing if you believe tech is overvalued right now.
The elephant in the room: Brexit
When British companies are brought up, Brexit is often raised as a reason not to invest. However, I think it's very important to consider that 75% of the revenue from the FTSE 100 comes from outside of the UK. The index is heavily weighted to those with a very international presence.
Even thought the FTSE 100 does appear to have lackluster performance over the 4.5 years since brexit (based on price), the FTSE 100 companies have been largely unaffected by the crisis, and have continued to remain profitable.
There was a big spike in the FTSE once the Brexit deal was announced. As the UK adjusts to the "new normal", and the Brexit stink dissipates, i suspect confidence will return and investment will follow.
Price
On face value, the index is still quite a bit below the highs seen over the last decade: https://tradingeconomics.com/united-kingdom/stock-market. At the time of writing it's trading 15% lower than its 2018 peak.
Price to earnings
The [FTSE 100 P/E was 17.5 at the end of 2020]. This is somewhat inline with the historical average. I would argue this is pretty decent for the 2020 year. If we assume earnings given a normal year would've be higher, then the price is quite a bit below the long term average and suggests good value.
Dividends
The FTSE 100 yield has been between 3.8 to 4.7% for the 2015 to 2020 period. The S&P 500 by comparison has been between 1.6 to 2% since 2016. The FTSE's 3.7% over 2020 seems particularly impressive given the COVID crisis when so many big names in the FTSE (Shell, for example) famously cut dividends. I would argue dividend payout should increase over the next couple of years and as such the share price should adjust accordingly. A 3.5% dividend is also pretty decent even if the value of the stock does not improve significantly.
Current political situation / COVID
The Conservative party are almost certainly in power until 2025, and given their pro-business nature, I would doubt they are going to interfere too much into corporate affairs. The Conservative party has also officially decided it's going to give state aid to UK companies (which was previously against EU rules). So, in short, you could buy into stock being propped by UK tax payers.
The UK is also likely to be a western country that will open up its economy in the 2nd half of 2021 due to its very impressive vaccination efforts (at the time of writing roughly 1/3rd of the UK population has received one jab, with that heavily leaning towards "at risk" groups). Of the British companies affected by COVID, this should bring about a boost and allow businesses to return to some normality faster than other nations.
How to invest
If you're willing to buy on UK markets, there's no shortage of ETFs that track the FTSE 100. The closest I've found in the US there is FLGB, which isn't an exact match but does track the FTSE 100 constituent companies to a reasonable extent.
Obviously, as this is an index, you're also free to cherry pick a handful of your particular favorites.
Submitted February 20, 2021 at 03:56AM by RonErikson https://ift.tt/3kijRcJ
