The FTSE 100 made a total return of close to 200 per cent in the decade after unconventional monetary policy was launched in the UK but the best performing stocks were up by much, much more than this.
The Bank of England introduced quantitative easing (QE) and took the base rate down to a historic low of 0.5 per cent on 5 March 2009, just days after the FTSE 100 had reached its rock bottom.
As we saw in a previous article, the decade that followed this led to some strong gains for UK assets. As the chart below shows, the FTSE 100 made a total return of 196.59 per cent over this 10-year period.
Performance of indices after 10yrs of QE
Source: FE Analytics
However, the FTSE 250 and FTSE Small Cap indices outperformed by a significant margin, both making a total return of just over 330 per cent.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “QE helped provide confidence and liquidity to markets and has been a positive force for markets and investors.
“Within the UK, small- and mid-caps have been the place to be, returning more than the big blue chips in the last decade. These areas of the market tend to be worse hit when there is a sell-off, but rise further when markets are buoyant.”
But where have the strongest returns come from the individual members of the FTSE 100 come from over the past decade?
Hargreaves Lansdown ran the numbers on the stocks that were found in the blue-chip index when the Bank of England first launched QE and found that the highest total return has come from Legal & General, which is up more than 1,600 per cent.
“As an asset manager its coffers can be expected to swell with the market,” Khalaf said. “But the company has also enjoyed tailwinds from automatic enrolment into workplace pensions, de-risking in defined benefit schemes and the rise of passive investing, where it’s one of the market leaders.”
Indeed, Legal & General recently became the UK’s first £1trn fund management house. The group’s fund arm, Legal & General Investment Management, grew by £42.6bn in 2018 despite the year’s market sell-off.
Source: Hargreaves Lansdown, Thomson Reuters 5 Mar 2009 to 28 Feb 2019
InterContinental Hotels Group is the FTSE 100 member that has posted the second-highest return, rising by 1,210 per cent under quantitative easing.
The company is one of the most profitable members of the index, due to its strategy of selling and leasing back a large percentage of its hotel portfolio. Its return on capital employed is around 40 per cent.
In the group’s 2018 results, chair Patrick Cescau said: “At IHG, we are well placed to capitalise. Our successful asset-light strategy and focus on distinctive hotel brands that meet guest needs and deliver strong owner returns is a proven one.
“This is illustrated by our global scale, the millions of guests choosing our brands, the many longstanding owner relationships we have and our respect within the investment community for delivering strong, consistent shareholder returns.”
In third place is Prudential, which is another insurance provider. The company’s revenue has grown at a compound annual rate of just under 10 per cent over the past six years, while analysts tip net profit to almost double in the coming two years.
The firm is also in the process of separating M&G Prudential — its UK operation – from the rest of the group in a bid to unlock value. This split is expected to complete in 2019 or 2020 and will leave Prudential’s business almost entirely focused on Asia.
While the FTSE 100 has had a relatively good decade with a doubling in price, Hargreaves Lansdown argued that valuations in the UK still look fair.
The platform noted that the index is trading on price-to-earnings multiple of around 14.6x, which is higher than the 7.3x times it stood at the beginning of March 2009 but in line with its long-run average of 14.3.
However, the firm’s preferred valuation measure of the cyclically adjusted price-to-earnings (CAPE) ratio, which takes a 10-year view of earnings. On this, the FSTE 100 is trading at 16.5x historical earnings, compared to 11.4 in March 2009 and a long run average of 19.4.
Of course, not every FTSE 100 member has had such a strong run as the above and Hargreaves Lansdown also looked at which companies fared the worst under 10 years of QE.
Source: Hargreaves Lansdown, Thomson Reuters 5 Mar 2009 to 28 Feb 2019
“Shareholders in the mining company Lonmin have been virtually wiped out over the period, with labour unrest in South Africa and low platinum prices hitting profits,” Khalaf said.
“Thomas Cook shareholders have likewise had torrid time, seeing the share price plunge in 2011 as political unrest in North Africa posed an existential threat to the travel operator. The last year hasn’t been kind either, as the heatwave which settled over southern Europe in the summer deterred holidaymakers from travelling south for sun. After such big price falls, neither Thomas Cook nor Lonmin are in the FTSE 100 today.”