Keep calm and carry on: Why I think Foolish investors should keep buying the FTSE 100
The market sell-off over the past few weeks has been frustrating for investors, but at the same time it has thrown up some tremendous bargains.
Chief among these are UK stocks. I’m not talking about any particular stock. I mean the entire UK market, which after months of gradual selling is now cheaper than it has been for decades.
Most hated market
Even though the FTSE 100 is a global index, with more than two-thirds of its profits generated outside of the UK, it seems as if investors around the world are dumping the FTSE 100 because of its association with Britain.
Indeed, the UK is currently the most hated developed equity market in the world among institutional investors according to Bank of America. Investors are reportedly afraid of what the next few years could bring for the country as it pushes ahead with Brexit.
I believe this is a fantastic opportunity for UK investors, particularly when it comes to the FTSE 100. As noted above, the FTSE 100 isn’t really a UK index, it is more a barometer of global economic health. So, even if we end up with a messy divorce from the EU, I think the long-term impact on FTSE 100 stocks will be limited.
And it appears as if now is one of the best times in history to buy the FTSE 100.
Cheaper than ever before
According to a report published at the beginning of this month, compiled by equity analysts at Goldman Sachs, some of the UK’s largest companies are now trading at their lowest relative valuation in 10 years.
Goldman isn’t the only bank that’s spotted value in the UK. Citigroup has also labelled the UK stock market its “favourite value trade.“
According to Martin Walker, who manages the Invesco Perpetual UK Focus and UK Growth funds, the UK market as a whole is trading on a 10% discount to its 20-year price-to-book ratio. This, he says is the “the largest discount of any major market in the world.“
So, on many different metrics, the FTSE 100 is cheap. It also offers an average dividend yield of nearly 4%, which is one of the highest yields on offer from any index.
Time to buy
All these numbers point to the conclusion that buying the FTSE 100 is a good decision for investors. Even if Brexit negotiations don’t work out favourably, it still has the potential to produce a mid-single-digit per annum return for investors in the years ahead with its 4% yield.
On the other hand, if a favourable exit deal is agreed for the UK, then the FTSE 100 could surge higher as international buyers return. It’s difficult to predict what the fair value of the index could be in the most optimistic scenario, as there are lots of different moving parts to consider. However, one group of analysts believe that in the best case scenario the index could achieve annual returns for investors in the 10% region for the foreseeable future. My colleague Kevin Godbold even believes it could treble in value over the long term.
So, there’s a 4% per annum return on offer in the worst case, and 10% in the best. Looking at these odds, I think the best course of action for long-term Foolish investors is to remain calm and keep buying the FTSE 100.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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