Should investors seek exposure to the FTSE 100? Here are the pros and cons

The index has lagged other parts of the world but it has the right qualities for the current environment

The FTSE 100’s brief flirtation with the 8,000 level is attracting a lot of attention. This may be a sign UK equities are still the subject of much scepticism, as the tone of the mainstream coverage seems to be one of pleasant surprise.

Bulls will point to fund management legend John Templeton’s axiom that, ‘Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.’ Bears will scowl and argue that capital is best allocated elsewhere, on the grounds the FTSE 100 is a 21st century index with a distinctly 20th century mix to it, given its reliance upon mining, oils, banks, financials and consumer staples and limited exposure to technology.

To try and ascertain where the UK market goes next, investors need to address four questions:

• Why has the index done so little since its December 1999 peak of 6,930?

• What are the major risks now?

• To what degree are the historic issues and prospective dangers priced in by prevailing valuations?

• What are the potential triggers for further upward moves?

No Party Since 1999

One major reason why the FTSE 100 has struggled to make major progress since the start of the Millennium is valuation, which is the ultimate arbiter of investment return. Using the index as a proxy for the wider market, UK equities were, frankly, overpriced in 1999 as technology, media and telecom stocks sluiced into the index, only to then fail to meet overhyped expectations and then sluice straight back out again.

Their far-from-graceful exit then left the FTSE 100 underweight in technology stocks and long-duration assets when they came back into fashion after the 2008 global financial crisis. A decade’s worth of low economic growth, low inflation and low interest rates placed a premium on dependable, sustained earnings growth and yield, which the FTSE 100 found it hard to offer, unlike tech and biotech stocks on one hand and government bonds on the other.

Instead, the UK benchmark was packed with short-duration, cyclical assets such as banks, oils and miners, with a little welcome stodge from consumer staples and pharmaceuticals on top.