FTSE-100’s strongest quarter in years is good news for investors
Towards the end of last week, the financial pages were heralding the best quarter in five years for the FTSE 100 index, and it ended the month with a rise of 21.3 to officially close for the quarter on 7,636.93. That represented an eight percent gain over the entire quarter, comfortably the strongest since the first quarter of 2013.
This came in spite of June itself seeing the index fall by half a percentage point amid global trade tensions sparked by the sabre rattling taking place in the USA and China.
Good news for investors
The short-term numbers might look a little worrying, with the FTSE index taking a further dip as trading got underway on Monday, but the big picture perspective suggests that those following FTSE 100 index trading strategies have got the right idea when it comes to the long term.
Holding an index tracking fund is often compared to spread betting, and while some see the parallel with gambling as something that might put them on their guard, it is a far more appealing option than the obvious alternative of holding shares in individual companies on the FTSE 100.
Recent events have shown that when it comes to the latter option, nothing is truly safe anymore. Firms like Centrica or Marks & Spencer are struggling with their own demons in relation to dwindling sales and well-publicized pension deficits. Even the giants like Royal Dutch Shell, HSBC or Legal and General Group can be hit hard by external factors such as volatile oil prices or even the fall out from Brexit.
A tracking fund spreads the risk and allows you to balance the troughs in one sector with peaks in another. And as far as long-term prospects go, it is worth keeping in mind that the FTSE-100 started out at a value of 1,000 in 1984.
Where has the recent growth come from?
It might sound counter-intuitive, but the relative weakness of the pound over recent months has led to improved returns for many FTSE-100 companies. This is because almost three-quarters of the revenue generated by these companies derived from overseas sales, and this means that trading is predominantly in US dollars.
As such their share prices have a greater tendency to track with the dollar than with sterling, and so the strength of the US economy has played into their hands perfectly.
An unlikely candidate as an alternative investment
This provides another insight into why the FTSE-100 index is a compelling investment option for those who want to spread their risk and look to the long term. It is not just that most of the constituent companies are tracking with foreign, and in particular US, markets. Many have few if any direct business dealings with the UK at all. Therefore this can almost be seen as a form of alternative investment strategy, and one that has little correlation with the strength or weakness of the broader UK economy.
What does the future hold?
With the bubbles still fizzing in the champagne glasses, things came down to earth with a bang as Q3 lurched into action with a one percent drop and the FTSE-100 closing below 7,600. This was due to a number of factors, including a downbeat start to the quarter on the Asian markets and the latest Purchasing Manager’s Index reflecting an underlying lack of confidence in medium-term growth due to Brexit drawing ever closer.
There is also the ongoing fear of a full-scale trade war developing, a factor which was contributory to June’s relatively poor performance compared with April and May. Nevertheless, if we know one thing about the FTSE-100 it is that short term blips are inevitable and it is the long game that should be the focus of attention.
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