The FTSE 100 has clawed back above 7,000 – how much higher can it go?

The FTSE 100 index has risen to over 7,000 for the first time in over a year – it now sits just above where it was in 1999. But its era of neglect could be coming to an end, says John Stepek. Here's why.

The FTSE 100 breached the 7,000 mark at the end of last week. That's the highest it's been since February 2020. Investors can be forgiven for feeling a little underwhelmed – most other indices have already breached their pre-pandemic highs. But might this be the start of bigger and better things for the UK's headline index?

To say that the FTSE 100 has not been the world's best equity investment is an understatement. It is now a whopping 1%-or-so higher than the 6,930 point that marked its dotcom peak in 1999. At first sight, that means the FTSE 100 has effectively gone nowhere in more than 20 years. Now, it's not quite that bad. The FTSE 100 is one of the world's most income-heavy stock indices. So you shouldn't judge it on capital gains alone.

But even if you account for dividends (and you should – note that Germany's index, the DAX, is a “dividends-included” index, for instance), the FTSE does not have a history of shooting the lights out. For example, the FTSE's all-time record high came in May 2018, at 7,877. If you'd reinvested your dividends between the FTSE 100's dotcom-era high and its 2018 high, you'd have roughly doubled your money, even with the index itself barely rising in terms of capital value.

But doubling your money is a poor performance if it takes nearly two decades to do so, and it's much much worse when you look at what you could've won (to quote the late lamented Jim Bowen). Obviously, in terms of major stock exchanges, the Nasdaq has been the place to be in recent years: it peaked at just under 5,000 in March 2000. It's now above 14,000. 

But you don't have to go that far afield. Indeed, the far-more domestically-focused FTSE 250's dotcom-era peak was just under 7,000; its pre-pandemic peak was around 22,000 in December 2019. Today, it's higher than that. In other words, you've more than trebled your money (and that's excluding dividends!) in the same time that you've barely doubled it on the FTSE 100.

Anyway, after that 2018 high, the FTSE 100 meandered around for a while, before crawling to within touching distance of that record again in January 2020. We all know what happened then. The question now is whether the FTSE 100 will play catch-up, or whether you'd still be better focusing on all of the indices that have already surpassed their pre-pandemic peaks.

That which was cheap shall be expensive

If we're talking about what's gone wrong, then from a global investor point of view, you can make an argument that Brexit definitely put a lot of big institutions off. They have a whole world of stocks to play in – if they can easily write off a small part of that universe then they won't have a problem with doing so. But, as you can see from the FTSE 250's performance, Brexit clearly isn't the whole story by any means.

One deeper issue is that the FTSE 100 does have a lot of stocks that are simply out of favour. The banks are mostly FTSE 100 stocks; the banks had their equivalent of the dotcom bust in 2008, and they're taking even longer than the internet stocks did to come back from it. Oil is a big component of the FTSE 100. Oil is largely viewed as yesterday's fuel and has had a particularly turbulent few years, even before the pandemic, as the supply landscape has been turned upside down by US shale oil. Another big component is commodities, which enjoyed a big bull market in the 00s, then a massive bear market from about 2011 to 2016. They've recovered since then but it's only since the post-pandemic bounce that investors seem to be more convinced that the rally has legs.

To cut a long story short then, the FTSE 100 has struggled due to being particularly heavily weighted towards “dinosaur” stocks. That is, industries and companies that are deemed either to have had their day, or which are at the “boring” end of their respective sectors. So you've got banks rather than fintech. And, to pick on a more topical industry, while the FTSE 100 does have some drug stocks, we're talking about big pharma rather than exciting biotechs. 

AstraZeneca has certainly not been a boring company to follow (though recently for many of the wrong reasons) but its rival in the FTSE 100, GlaxoSmithKline, could be a contender for dullest stock of the decade, certainly in terms of performance (I own it, by the way). No wonder an activist investor is getting involved now (we might look at that story in more detail another day).

Anyway – the point is, the FTSE 100 has been neglected for fairly obvious reasons. In many ways, it's been the opposite of the Nasdaq. The FTSE 100 is an index full of boring old stocks – the Nasdaq is an index full of exciting new economy stocks. 

The arguments for the FTSE 100 now are twofold. One is that it's cheap relative to most global markets. Two is that a strong recovery will arguably be better news for the boring old stocks than for the exciting new stocks. The former are cheap and less vulnerable to higher interest rates or inflation, the latter are expensive and more vulnerable to a change in the macro backdrop.

Arguably, what helped the FTSE 100 claw above 7,000 last week was clear evidence of a strong recovery in the US as the data beat expectations. In short, the things that have made the FTSE 100 unfashionable are now the same things that might make it fashionable again. So it's definitely worth having some exposure if you don't already.

We've looked at the market on several occasions in MoneyWeek magazine over the last few months. If you're not already a subscriber, you can get your first six issues absolutely free when you sign up now.

Most Popular

The MoneyWeek Podcast: Asia, financial repression and the nature of capitalism
Economy

The MoneyWeek Podcast: Asia, financial repression and the nature of capitalism

Russell Napier talks to Merryn about financial repression – or "stealing money from old people slowly" – plus how Asian capitalism is taking over in t…
16 Jul 2021
The future belongs to emerging markets – three EM stocks to buy now
Share tips

The future belongs to emerging markets – three EM stocks to buy now

Professional investor Carlos von Hardenberg of Mobius Capital Partners picks three of his favourite emerging-market stocks.
5 Jul 2021
Three companies that are reaping the rewards of investment
Share tips

Three companies that are reaping the rewards of investment

Professional investor Edward Wielechowski of the Odyssean Investment Trust highlights three stocks that have have invested well – and are able to deal…
19 Jul 2021