FSTE 100 is currently at level where it was in 1998. It is trading at almost 22 years low now. So is FSTE 100 on sale? In other words, is FSTE 100 undervalued or diminishing?
FSTE 100 has had difficult times over the past few years, mainly due to eurozone crisis in 2010s and Brexit since 2016. Finally the pandemic led FSTE 100 to crash and reached below 5000 which was at a level in late 1997.
Since then FSTE has recovered slowly but not fully to reach its highest level of 7500 in Jan 2020.
How FSTE 100 Rebounded Compared to Global Market
As we all know, the pandemic not only impacted FSTE 100 but the market all over the world was collapsed. However, most of the other markets have rebounded quickly as supposed to FSTE 100.
The below table shows how the markets have rebounded since the stock market due to pandemic.
FSTE 100 have lost more than 40% and rebounded 18.35% since March 2020. But it is still 22.33% lower than it was at start of 2020.
Whereas, most of the other market such as US, China and India have recovered quickly and trading currently above its all time high.
Especially, the US markets NASDAQ has gained 30.83% and S&P 500 gained 7.72% YTD. Although, it is largely due to monetary policies and stimulus but contradict to its earnings and economy.
However, FSTE 100 is plunged by 22.33% YTD and closely followed by second worst by Russia RTSI market.
This certainly raises a question. Is FSTE 100 really undervalued or diminishing? Is it really worth investing in it?
Let’s analyse what is going on in the market and UK economy.
FSTE 100’s Dependency on US Dollar
In the interest of the US economy, Federal reserve have kept the interest lower but longer in addition to the stimulus which largely helped US stock market recover.
As a result, the US dollar as lost its value. Due to this, the pound value increased against the dollar and this largely impacted FSTE100. Why does the value of US dollar matters to FSTE 100?
Most of the companies listed in the FSTE 100 are actually operated outside of UK and their earnings are made in US dollars and other foreign currencies.
However, these FSTE 100 companies have headquarters in the UK and their profits are reported in pounds. When the earnings converted back into pound sterling are less valued.
The weakening of dollar and strengthening of pound more often resonates with a falling FSTE 100.
FSTE 100 Stocks
FSTE 100 and even the entire UK market is largely constructed by companies that nobody wants to invest in. Old-fashioned energy, miners and banks are most of the stocks in FSTE 100.
The companies in the industry such as retails and oil are saturated. These companies not able to produce huge growth to drive FSTE 100 upward. As FSTE 100 is dominated by oil companies, the crash in the oil price led to collapse of FSTE 100. The pandemic and Brexit have made it worse for FSTE 100 to grow.
Investors are eyeing on investing in tech companies that innovates and changes the world. In FSTE 100, there are no technology companies that are at the heart of the innovation we usually see in the US market.
This is a huge reason why the investors are staying away from large cap companies in FSTE 100.
UK GDP in Aug 2020 is increased by 21.7% from the April 2020 low. However, it is still 9.2% below the levels in Feb 2020 before the pandemic.
There is still a lot work need to be done to rebound to its original levels. However, the increased growth from levels below in April 2020 is far higher than the analyst have predicted the GDP to rebound. This is certainly positive and give the hope the UK economy will rebound quickly.
For Jun to Aug 2020, the estimated UK unemployment rate was 4.5%. This is only 0.5% higher than pre-pandemic levels in Feb 2020.
However, the redundancies increased at a record highest level since May to Jul 2009. This may come down with the furlough extended for second lockdown.
In Sep 2020, the retail sales volumes grow by 1.5% from Aug. When compared to pre-pandemic levels in Feb 2020, the volume sales increased by 5.5%. This is as result of 5th consecutive month of industry growth from May to Sep 2020.
This is positive sign because the retail companies in FSTE 100 is seeing a growth since the pre-pandemic in Feb 2020. This may indicate FSTE 100 is undervalued.
Based on the data released by IHS Markit/CIPS UK Manufacturing PMI in October 2020, the UK manufacturing activities have seen solid growth for the fifth consecutive month. The orders and output have seen a raise due to the strong demand both overseas and domestic.
Cyclically-adjusted price to earnings (CAPE) ratio helps to decided if a market or a stock is overvalued or undervalued by comparing to its historical value.
PE ratio is commonly used to analyse a value of market or stock but it is calculated using one year’s earning.
Whereas, CAPE ratio is calculated using average earnings for 10 years period. It is calculated by diving the latest share price by average earnings for the last 10 years and it is also adjusted for inflation.
The average CAPE ratio for FSTE 100 is 14. The FSTE 100 is currently has a CAPE ratio of approx. 12 which is below the 10 year’s average CAPE ratio.
This indicates that FSTE 100 is undervalued and there are potential to upward largely rather than the risk of downside.
Looking at the CAPE ratio reside below the 10 year average, it is evident that FSTE 100 is undervalued. Considering the UK economy is marginally recovering, it is possible that FSTE 100 has potential to increase from current levels.
But, yes, FSTE 100 do not has high growth tech stocks and the currency risk and Brexit concern is still imminent, so FSTE 100 will not explode has NASDAQ.
However, it is not so long for the world to recognise that electric cars can’t be made without copper and miners are valuable companies too.
The long term data always shows that value investing has outperformed growth investing. Soon the FSTE 100 will regain when investors realises the value in the FSTE 100 stocks.
I personally have a small portion of my portfolio invested in FSTE 100 and I may add some more to my portfolio.