More reasons to steer clear of the FTSE 100

I wrote here a few weeks ago that the FTSE 100 is a pretty no-growth place to invest. You might be getting good dividends from many of its heavyweight sectors, but ten years from now you might see those dividends as little more than the slow return of your own capital.

I mentioned at the time that various sectors – from banks to utilities – were likely to see any future growth severely inhibited by changes in regulation.

I am not the only one who is nervous about this kind of thing. James Clunie, the manager of Jupiter’s Absolute Return Fund is “very scared”. He tells the FT today that “on a scale of one to ten I am an eight or nine”. All because of Ed Miliband.

Over the last year, Miliband has outlined a variety of proposals to have a go at what he calls “predatory capitalism”.

There is to be a freeze on energy prices; a break-up of the banks; a clampdown on payday lenders and betting shops; and a plan to seize undeveloped land being held in housebuilders’ land banks. Clunie also thinks that we should consider the possibility that a Miliband government might even nationalise the energy industry. “It is not a zero possibility.”

Look at this as one list and you can see the problem: it is market-moving stuff – the kind of thing that “leads to fear and requires discounting”.  Should you worry? Probably.

Only this morning, shares in Centrica fell nearly 3% after the current energy secretary wrote to the regulators suggesting they have a good look at the profits of the big six energy companies, and even suggested that the firm might need to be split up.

All good reason, perhaps, to start to think about how much exposure to have to sectors at risk from state interference via UK income funds or FTSE 100 trackers.

PS Another article in today’s FT extends the argument against investing in banks. According to PwC, the huge amount of capital available to asset management firms globally is likely to see them pushing into the shadow banking sector at the expense of real banks. The latter will end up becoming “more like utilities”. There isn’t much growth in that.

  • What do you think the term is on this situation? A temporary decline or more long-term? The FTSE has traditionally done pretty well over the long term (excluding the major recessions). Pretty worrying to hear about Centrica too. Do you think it’s realistic that they’ll need to split?

  • The FTSE100 is 30 years old this year. In its thirty years it has risen almost continuously for 17 years and fallen for the last 13 years. As baby-boomers retire and move their money from pension funds to annuities (which buy bonds) the FTSE will fall even further. If anyone is interested, I’ll be giving a talk in London on the evening of 24 February THE GREAT SAVINGS AND PENSIONS SCANDAL for the Economic Research Council Why not come along?

    • Chris N

      David – any intelligent baby-boomer will not move their money from a pension fund to an annuity. Annuities are for suckers only. Intelligent boomers will use income drawdown until they’re 75 atleast. By that time the great annuity scandal will have made the bank payouts from the PPI scandal seem like chomp change and , hopefully, 50% of all Fund Managers will be out of business. If we’re really, really lucky Gordon Brown will also be in prison for his part in precipitating the pension fund scandal

  • Georoy

    Let’s not forget it’s the actions of the banks and power companies that has brought about the possibility of political interference, we live in a democracy were actions have consequences they should have thought about it.

  • David Cockburn

    While I agree with the political risk in FTSE100 shares, I do think the UK economy is on the right track and shares here are less expensive than in the US. So I’m investing in the lower profile companies of the middle market, long MIDD.L

  • Pinkers Post

    Yes. Perhaps with the exception of HSBC?

  • MichaelL

    “but ten years from now”

    the FTSE may well contain a different set of stocks.

    i) the index is fixed.
    ii) FTSE is international in outlook.

    “Only this morning”

  • Ian A

    I think it is about time we had an article on how to plan for a Labour Govt. What will it mean for shares etc?