The FTSE 100 index is ready to rally

The FTSE 100 index – made up of unfashionable “old economy” stocks – has lagged other major stockmarkets. But global reflation should see its weaknesses turn into a strength.

On 12 February 2020 the FTSE 100 hit a pre-pandemic peak of 7,534, says Tom Howard in The Times. One year and a “vaccine-fuelled” rally later and it is still more than 12% short of that level. That compares unfavourably with other major stock markets, with the MSCI World index regaining its pre-Covid levels by August. 

The key issue for the FTSE is its sectoral composition, says James Coney in the same paper. The FTSE 100 is full of out-of-fashion energy businesses, banks and high street retailers. In this age of frenetic digital innovation, it has just three tech firms that comprise 0.7% of the index. Tech accounts for 30% of America’s S&P 500. 

Ocado is the FTSE 100’s only real tech star, adds Howard, but London’s junior market, Aim, looks more promising, boasting the likes of Asos. The Aim index has gained more than 25% in the past year even as the blue-chips have sagged.

Global reflation should see the FTSE’s weaknesses turn into a strength, says Paul Dales of Capital Economics. Global economic recovery will bring more prosperous times for the FTSE 100’s stable of “consumer-facing, energy and financial” businesses. On a cyclically-adjusted price/earnings ratio of about 14 the index looks like a bargain compared to other developed markets and should attract growing interest. Dales thinks the index could rally more than 20% between now and the end of 2022.

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