Can FTSE get back on track like singer Kate Bush?

Can FTSE get back on track like singer Kate Bush? Blue chips may soon be climbing that hill

We are in 1984. Great Britain is in the grip of the miners’ strike; singer Kate Bush’s fans are speculating about her next album and a stock market index has been launched – the FTSE 100, soon to be known as ‘the Footsie’.

Thirty-eight years later, major industry action is back and Kate Bush is back on the charts, with fans hoping she’ll release new music.

Meanwhile, amid market turbulence, the FTSE 100 index, which includes household names like Aviva, BAE, Lloyds and Rolls-Royce, has fallen 6% since the start of 2022.

It could be worse – it’s still the best performing major index in the world. The Dow Jones fell 19%, the S&P 500 24%.

Some fear, however, that the relative resilience of the Footsie will be short-lived. The Bank of England, City chief executives and top economists believe the UK is headed for recession.

In the United States, similar warnings have been issued by Tesla boss Elon Musk, economist Nouriel Roubini and Goldman Sachs chief economist Jan Hatzius. A US recession would compound the misfortune here.

Still, it’s worth noting that the big companies that make up the FTSE 100 should be better able to weather economic storms, while still providing income. The average dividend yield on the index is 3.91%. It may not match inflation, but there is potential for capital growth.

US indices fell largely as inflation and interest rates rose on companies that didn’t exist when the Footsie was created, such as Amazon and Netflix.

The streaming service’s use of Kate Bush’s Running Up That Hill track in its drama Stranger Things has rekindled interest in the star.

The Footsie was less hard hit as it has no such stocks.

The weak pound has also made London-listed companies attractive to US private equity players looking for bargains. The index’s forward price-to-earnings (p/e) ratio is 12, making it cheap compared to the Dow Jones and S&P 500 whose p/e ratios are 17 and 20, respectively.

The decline in the pound since Brexit has increased the value of Footsie businesses’ dollar earnings in sterling terms. No less than 75% of their income comes from abroad.

Soaring oil and commodity dollar prices helped the Footsie.

Indeed, the power of its energy and mining components – giants like BP and Shell – is such that it is seen as a hedge against inflation. AJ Bell’s Russ Mold says these businesses account for 22% of Footsie’s total valuation, 45% of its projected earnings and 34% of its projected dividends for 2022.

But let’s not overlook the risks. Mold says: “The danger is that a recession will lead to the destruction of demand, oil and metals prices to fall, taking with them FTSE 100 earnings and dividends, which would mean the market might not be as cheap as it looks.”

Skeptics of the FTSE 100 point out that the current level of 7190 is only slightly higher than on December 31, 1999, before the dotcom bubble burst.

But his companies have since paid billions in dividends, and this year dividends are expected to total £81.2bn, while share buybacks are expected to reach £32.7bn. Rio Tinto, Shell, Glencore and BAT, the most generous members, could together distribute £23.4 billion.

All good news for funds like The Merchants Trust. This investment trust focuses on high yielding Footsie companies. Manager Simon Gergel says: “The 100 is trading well below the valuation of other developed markets, so we can find companies priced below what we think they are really worth. They can provide good income.

If you avoid Big Tobacco, oil and miners for ethical and ecological reasons, the Footsie may have little appeal. You might be more concerned about committing cash to an action.

One way to reduce risk is to invest small amounts each month in appropriate trusts and funds – an approach I like. Options include low-cost index trackers like iShares 100 UK Equity and Vanguard FTSE UK Equity Income or an active fund like Troy Income & Growth, which has exposure to Footsie names like Diageo but avoids oil and mining mining.

Whichever you choose, you will hope that the economy will soon climb that hill.


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