Why the FTSE 100 has a chance to challenge 8,000 in 2020

The FTSE 100 is barely any higher than three years ago and the pound is still way below where it was in summer 2016, so it is relatively easy for value-seeking contrarians to make a case for a UK stock market which has underperformed, feels unloved (judging by fund flow data) and looks potentially undervalued on the basis of earnings and yield. As such, the FTSE 100 may have a better chance of making it to 8,000 by the end of 2020 than many suspect.

Granted, the issue of Brexit must still be resolved and doubts continue to hover over the health of the global economy. However, were the UK to strike a trade deal with the EU, Washington and Beijing to settle their differences once and for all and governments around the world abandon austerity and launch looser fiscal policies then the world could look very different.

Even if the FTSE 100 fails to challenge the 8,000 mark, investors may still be able to prosper through careful stock selection, as the index is packed with companies which either look cheap on an earnings basis, offer a fat dividend yield, or both.

In total return, sterling terms, the FTSE 100 has underperformed again, relative to its global peers in 2019. It has done less well than the other developed market options, America, Western Europe and Japan and even lagged Eastern Europe, while it has managed to fare better than only the Africa/Middle East region, Asia and Latin America.

Ongoing fund flows also suggest the UK equity market is unloved, with data from the Investment Association showing that nearly £15 billion has fled the asset class since the EU referendum in 2016.

Source: Refinitiv data. Total returns in sterling terms from 1 January to 9 December 2018.

Unloved often means undervalued and the UK is not expensive relative to its international peers or its own history on an earnings basis, with the FTSE 100 trading on around 12.5 times consensus earnings estimates for 2020.

In total, 20 FTSE 100 firms trade on a price/earnings ratio of 10 times or less for 2020. Even if some of the earnings forecasts upon which those multiples are based prove optimistic, it is still possible to argue that you can buy good quality UK-listed firms cheaply, especially if you are an overseas investor, with sterling still relatively depressed.

Twenty cheapest FTSE 100 stocks, based on 2019 price/earnings ratio (PE)

Source: Digital Look, Refinitiv data, consensus analysts’ forecasts

It is also possible to argue that the UK looks attractive on a yield basis, as the FTSE 100 offers a prospective yield of 4.7% based on aggregate consensus analysts’ forecasts for 2019.

This beats the 0.75% Bank of England base rate pretty handily and also outstrips the 0.77% yield available on the benchmark, 10-year UK Government bond, or Gilt.

Granted, dividend growth is forecast to slow to just 2% in 2020 and earnings cover for the dividend is still thinner than ideal at 1.69 times, although this is still the best level of cover since 2014.

There are 33 firms within the FTSE 100 which offer a yield of more than 5.0%

Source: Digital Look, Refinitiv data, consensus analysts’ forecasts

The yield available from those 33 stocks, and the index overall, does at least mean that investors will be compensated at least to some degree for the risk they are taking with UK equities while they patiently wait to see how the negotiations with Brussels ultimately pan out.

But there is value to be had beyond the confines of the FTSE 100’s multinationals, too, and investors looking to build a portfolio of UK firms could delve down into the FTSE 250 (or below) as well.

These articles are for information purposes only and are not a personal recommendation or advice.