Due to Covid-19, bearish sentiment, and other factors, the FTSE 100 is a lot lower than where it was at the beginning of the year.
As a result of the decline, many investors think the leading British index could be trading in ‘value territory’, where the intrinsic value of the index’s components is worth more than the price that the market accords it.
Having potential ‘value’ isn’t the only reason to be long-term bullish on the FTSE 100, however — I think there are two other reasons to be bullish for the long term:
Growth in developing and emerging markets could help demand
One of the key drivers of global stock market returns in the past few decades, with the FTSE 100 benefiting as well in my view, has been the increasing spending power in emerging and developing countries.
Although the Footsie is a British index, many of its constituents are global in nature. Unilever, for example, gets more business from emerging and developing markets than in developed ones. HSBC also gets more profit from the East than it does the West.
As a result of the growing middle class in emerging and developing countries such as China and India, many FTSE 100 components have thrived and the index itself has increased in terms of the last three decades.
Going forward, many economists expect the trend of emerging and developing markets growth to hold. According to Bloomberg’s analysis of IMF data, for instance, China will account for 26.8% of likely global growth next year, and India will contribute around 10.2%. The US, meanwhile, will contribute just 11.6% according to estimates.
If they succeed, I think the increased spending power of emerging markets countries should benefit many Footsie components and thus benefit the index as a whole.
Increasing productivity could be good for the FTSE 100
Over the past three decades, the FTSE 100 has benefited as global productivity has increased due to advances in semiconductor and IT tech.
Specifically as it relates to semiconductors, faster processing speeds have made possible numerous new tech applications such as smartphones, by making them more affordable and more practical.
Technologies such as smartphones have in turn made possible numerous productivity enhancing technologies. With smartphones, for instance, workers can better communicate with their coworkers via an app like Zoom and thus potentially be more efficient.
With increased productivity, the world has produced more products/services and many workers have realised more disposable income as a result. Given higher disposable incomes in various markets, demand for many FTSE 100 components has increased and the index as a whole has benefited in my view. Increased efficiency has also helped many FTSE 100 companies in terms of higher profit margins.
Going forward, I believe the trend of increasing productivity due to advances in technology will continue. Many analysts expect advances in AI, quantum computing, and 3D printing to make possible numerous new applications that could make the world even more efficient.
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Jay Yao has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Zoom Video Communications. The Motley Fool UK has recommended HSBC Holdings and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.