In this month’s video, Investment Director, Ritu Vohora looks at the evolution of the FTSE 100 over the past 35 years and whether UK equities are a buying opportunity
As 2019 begins, it inherits a long list of risks and uncertainty from a tumultuous 2018, that ended on a painful note. Last month was the worst December on record for global equities and 2018 the sixth worst year.
Uncertainty has played havoc with the markets in recent months and that could well continue to be a theme of 2019. As risk aversion set in, safe havens such as gold and US Treasuries provided only modest relief. The dollar was the only asset class to finish the year in the black. Global equities fell 9%, in dollar terms, the worst year for the MSCI All Countries World index since 2008’s Global Financial Crisis.
In December, the US was the worst performing region as investors considered the possibility that the US economy would join the global slowdown. Despite US stock markets posting their worst year in a decade, the US finished 2018 as the best performing region for the year. Emerging markets had a torrid 2018, finishing the year as the worst performing region, with China the worst performing stock market. China’s slowing economy and trade tensions continued to weigh on the region. The FTSE 100 touched a new two-year low in December, having hit a record high in May. Oil also lost ground as investors fretted about the strength of the global economy heading into the new year.
From a sector perspective, utilities had the largest positive performance rotation during the year, joining healthcare as the two best performing sectors. In contrast, tech hardware had the largest negative rotation over the year. Cyclical sectors materials and financials, especially banks, fared the worst in 2018.
Market volatility over the past year is exemplified by the FTSE 100, which hit a record high of 7,877 points in May before touching a 28-month low in December. While the headlines have focused on the index tumbling 12.5% in 2018, its biggest fall in a decade, the 3rd of January also marked the index’s 35-year anniversary. Its membership has changed quarterly as the fortunes of constituent companies have risen and fallen.
After a turbulent year, it is helpful to step back and look at what you are investing in. The index looks significantly different from the 1980s. Only 27 of the original 100 great British companies are still in the index today. These include Barclays, BP, Glaxo, M&S and Unilever.
Despite significant changes, the index has offered decent performance, with a price return of 573% since 3 January 1984.
The changing list of constituent companies, mirrors significant shifts reflecting the global economic revolution: from industrial might to digital creativity. Industrials was the largest sector in 1985, accounting for almost 24% of the index compared to just 7.8% today. Meanwhile, the technology sector did not even exist back then.
The FTSE 100 has also evolved from a UK-centric index to one that represents the global economy. Many constituents are internationally focused companies, with more than 75% of index revenues derived from overseas. The index’s movements are therefore a weak indicator of the country’s corporate health and how the UK economy is faring and is significantly affected by the exchange rates of Sterling. A better indication of the UK economy is the more domestically focused FTSE 250 Index.
The FTSE 100’s overseas exposure offers investors a natural hedge against a decline in sterling. In the three months after the Brexit vote, the FTSE 100 grew 10% as sterling plummeted 12% relative to the dollar. Yet recently this correlation has broken down, in part due to higher local inflation and rising interest rates abroad. Sterling remains a key risk for UK investors as we approach the Brexit deadline.
There will be volatility ahead, but valuations have priced in a significant amount of bad news and an implicit Brexit discount. UK assets are now very cheap both versus history and relative to other global markets. Arguably this presents a once in a generation opportunity to find good quality companies at bargain valuations. It’s important to take a long-term view and focus on fundamentals.
The main risk is around earnings disappointment, with the FTSE 100 offering a current dividend yield of 4.8%, which is at historical highs. If earnings hold-up, however, there could be plenty of upside. In the event of a ‘hard’ Brexit or ‘no deal’ scenario a further collapse in sterling could help propel the FTSE 100 higher, given its relatively low domestic exposure. In the event of a ‘soft’ Brexit the index could enjoy a relief rally as some uncertainty is lifted.
The lesson of the FTSE 100 over the past 35 years is that the future rarely turns out as we imagined, and companies that seem permanent rarely turn out that way. Companies are bought, merged, or simply fail, while new companies emerge to take their place. The key is to take an active approach and gain exposure to a diversified mix of assets and not to become too fixated with single or localised issues – including Brexit.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.