FTSE 100 forecast: is now the time to invest in the index?
By Rob Griffin
Updated
The FTSE 100 Index (UK100), also known as the ‘Footsie’, is made up of the 100 largest companies listed on the London Stock Exchange (LSE), ranked in order of their market capitalisations. This ‘market cap’ figure is calculated by multiplying the company’s stock price by the number of shares that it has issued. The index is reviewed four times a year – March, June, September and December – to ensure those with the highest market caps are included.
According to FTSE Russell, the index provider that oversees the FTSE 100, the regular quarterly rebalancing plays an important role in the dynamics of the UK stock market:
“The rules-driven, impartial quarterly reviews ensure the indexes continue to portray an accurate reflection of the market they represent and form an essential component to the management of the indexes.”
Any constituent changes are implemented after the close of business on the third Friday of the review month. This means they will be effective from the following Monday.
The FTSE 100 Index is widely viewed as a barometer of UK investing health, even though many of the companies on the index are global businesses.
The FTSE 100 today
The five largest companies in the FTSE 100 account for almost 25% of the index weighting, according to FTSE Russell. AstraZeneca (AZN), the pharmaceutical giant, is the largest stock with a market capitalisation of just over £131bn. It also makes up almost 7% of the index. Unilever (ULVR), the consumer goods firm, is the next biggest with a market capitalisation of £105bn and a 5.46% index weighting.
Drinks company Diageo (DGE), HSBC (HSBA) bank, and drugs company GlaxoSmithKline (GSK) are the next biggest companies appearing in the index.
There are currently 19 sectors included in the FTSE 100, with industrial goods and services being the most popular with 18 companies represented. It’s followed by financial services with 10 companies, basic resources with eight, and the six stocks in consumer products and services.
The FTSE 100’s latest developments
The latest FTSE 100 news is that British supermarket Morrisons (MRW) and the UK aerospace and defence group Meggitt (MGGT) were promoted in the most recent quarterly index shake-up. Both companies have seen their share prices rise considerably in recent months as they’ve been the subject of enthusiastic takeover battles.
Morrisons, the UK’s fourth-largest supermarket, has benefitted from the attention of rival private equity groups Clayton, Dubilier and Rice, and a consortium led by Fortress Investment Group.
Meggitt, meanwhile, has seen its share price rise as US engineer Parker-Hannifin and TransDigm have traded blows in a bid to take over the business.
In the meantime, Weir Group (WEIR), the Scottish engineering company, has been demoted to the FTSE 250. Just Eat Takeaway.com is recently out of the index for a different reason – its nationality has been reassigned from the UK to the Netherlands, which makes it ineligible for inclusion in UK indices.
The FTSE 100 performance since the start of COVID-19
The FTSE 100 fell dramatically on 12 March 2020 as share prices felt the effects of the escalating COVID-19 crisis and fears of a global recession. More than £191bn was wiped off its value as it sank 10.87% in its worst session since the Black Monday crash of 1987.
While there have been some setbacks over the following 18 months, the FTSE 100 has gradually been increasing in value since then, according to analysis from Statista.
The FTSE 100 has, broadly, enjoyed a decent time in 2021. It started the year around 6,500 points, with much of the world still battling coronavirus lockdowns. Concerns about the tougher global restrictions being brought in to manage the virus caused the index to sink to around 6,400 points by late January. However, the situation has since improved. By mid-April, it had climbed above 7,000 points for the first time in 2021 and reached the 7,220 level in the first couple of weeks of August – its highest level year-to-date.
On 3 September, the index ended the trading day at 7,138 points.
As of 31 August 2021, over the past year, the FTSE 100 has returned 23.6%. The past six months has seen it achieve a 12.4% return. The three-year compound annual return, meanwhile, is 7.5%, while the five year figure is 27.5%. However, the year-to-date return for the FTSE 100 is 13.3%, lagging the FTSE 250, which has returned 19.3% over the same period.
Looking at the index’s past performance, what are the FTSE 100 predictions from the market experts?
FTSE 100 future predictions: where to next for the blue-chip index?
The performance of the FTSE 100 is actually less exciting than that of the FTSE 250, according to Sarah Coles, personal finance analyst at Hargreaves Lansdown. She told Capital.com:
Coles believes this is partly due to a numbers game: “If you’re a massive company, improving your profits by 1% involves an enormous uplift in cash terms. If you’re slightly smaller, then a bump is much easier to come by.”
Ben Yearsley, investment director at Shore Financial Planning, believes there’s a reason why the FTSE 100 hasn’t delivered fantastic returns over the past decade. In a note to Capital.com, he explained:
It is also dividend-heavy as well. Yearsley added: “This didn’t help last year when many dividends were cut or suspended. However, that should be a positive going forward as companies play catch up; income generation should be decent for the next few years.”
So, what’s the FTSE 100 outlook?
Of course, predicting the movement projection of an index is very difficult due to the sheer number of companies – each with their own positives and negatives. The prospects for individual companies, global sector issues, and a wide range of economic factors will influence the FTSE 100’s returns in the short term, as well as longer periods such as up to 2025 and 2030.
As the world recovers from the effects of COVID-19, the FTSE 100 could hit 8,000 points over the coming year, according to FTSE predictions from Longforecast. It is predicting a minimum value of 7,528 points for September 2022 and a maximum of 8,490 points.
In the meantime, data platform Trading Economics projects that the index will decline over the coming 12 months. Its FTSE 100 forecast indicates that the market has potential to fall to 6,964 by the end of September, and drop further to 6,458 in one year’s time.
Russ Mould, investment director at AJ Bell, told Capital.com that the index is likely to be affected by different economic backdrops: “The FTSE 100 has the potential to do well in an environment where global economic growth is strong, the cycle is turning up, inflation is creeping higher and interest rates are rising and yield curves steepening.”
Conversely, there are conditions in which it may find life harder. In his UK100 forecast, Mould added: “It may struggle if an unexpected global downturn hits home or we remain mired in the low-growth, low-rates, low-inflation funk that has characterised the past decade.”
When considering analyst commentary or predictions from algorithm-based forecasting services, it’s important to keep in mind that they can get their estimates wrong. You should always do your own research to form a view of the outlook for an asset and the relevant market conditions.
FAQs
Is the FTSE 100 a good investment?
It depends on what you’re wanting to achieve and your appetite for risk. If you believe the FTSE 100 will continue to rise over the longer term then you may want to have exposure. However, you need to do your own research into the UK100.
Will the FTSE 100 continue to rise?
It will largely depend on whether COVID-19 continues being a threat to international markets for the rest of 2021 and into 2022.
Should I invest in the FTSE 100 now?
It depends on your investment goals. If you are looking for a diversified spread of well-known companies with international businesses, it may be suitable. However, if you want more focused exposure on the UK economy, then the FTSE 250 is probably a better representation. All your investment decisions should be based on your own research.
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