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Last year was dire for investors around the world, as stocks and bonds fell together for the first time since the 2007-09 global financial crisis (GFC). This made 2022 investors the worst year since 2008. But the FTSE 100 dodged this storm.
The FTSE 100 reaches an all-time high
At the end of 1999, the FTSE 100 closed at 6,930.2, a record close. But the stock market crashed in 2000-03, more than halving Footsie’s value. The index then more than doubled in mid-2007, before crashing again during the GFC.
Finally, the index reached a new high of 7,877.45 on May 22, 2018. But it fell again and it took almost five years to break this mark. On Friday it reached a record of 7,906.58 points, before closing at 7,901.8.
In other words, the index has gained 14% in more than 23 years. That’s a CAGR of 0.57%, a minimal return for nearly a quarter century of risk-taking.
However, FTSE 100 companies often pay decent cash dividends. Adding these cash payments at, say, 3% per year increases this annual return to around 3.5%. That’s much better. Also, no one invests all their money at the peak, so the return for most UK shareholders should be comfortably above this number. Phew!
betting on the footsie
Since the GFC, our family portfolio has been heavily invested in US stocks. Given the large outperformance of the S&P 500 against other leading indices since (+181.5% since late 1999), I am pleased with our asset allocation.
But in late 2021, I repeatedly warned that US stocks, especially tech companies, were vastly overvalued. So we reduced our exposure to the US and invested more in the ultra-cheap FTSE 100. This helped us avoid the worst of the 2022 market turmoil. However, we still lost money, posting a single loss. low digit.
The FTSE 100 faces two problems
For me, the main reason the FTSE 100 did so well in 2022 was its composition. In short, the index lacks the mega-cap tech stocks that dominate US stock indices, as technology accounts for a small proportion of Footsie’s value.
However, this supposed strength of the index could, over time, become its biggest weakness. The first problem is that Footsie is dominated by sectors of the old economy, including oil and gas, mining, banking, and other finance.
Therefore, the FTSE 100 is heavily dominated by value stocks, rather than growth stocks. And when investors turn away from growth and back into value, the index could take a beating. This could happen when the global economic recovery picks up pace after interest rates peak.
The second problem is that the index is heavily concentrated in just 10 mega-cap stocks. Together, these top 10 account for almost £984 billion of the total index valuation of £2.14 trillion. That’s about 46% of the total. Therefore, almost half of the index’s performance depends on just 10 companies, which is a concentration risk.
Despite these concerns, I remain very positive on the outlook for the FTSE 100. Even though it is at a record high, it looks pretty cheap to me and offers a decent dividend yield. Therefore, I will continue to buy it in 2023-24, or until its valuation no longer looks attractive.
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