Last year was a particularly strong one for the FTSE 100. It gained almost 7% and in doing so reached record highs. With its dividend yield of almost 4% added to its capital growth figure, the total return provided by the index was around 11%. That’s approximately 50% higher than its expected annual return.
Looking ahead, the index faces a number of political and economic challenges. Brexit is moving closer, global economic risks remain and the UK’s uncertain political outlook could cause investor sentiment to decline. However, with what seems to be a low valuation and a lack of appeal of other major asset categories, the FTSE 100 could rise yet further.
Low valuation
With a dividend yield of 4%, the index appears to be relatively cheap at the present time. This figure is towards the upper end of its historic dividend yield range and means that even though it recently hit an all-time high, there could be further upside ahead.
Compared to other global indices, the FTSE 100 also appears to be cheap. The S&P 500 has risen significantly more than its UK peer, gaining 18% in the last year. This means it has a dividend yield of just 2% at the present time. In theory, this could mean that the FTSE 100 could double before being as expensive as the S&P 500. As such, there could still be significant upside potential ahead.
