Nick Train reveals what will drive long-term FTSE returns

Interactive Investor is 21 years old. To celebrate, our top journalists and the great and the good of the City have written a series of articles discussing what the future might hold for investors. 

The All-Share index was first calculated in April 1962 at a maiden value of 100. At the time of writing in mid-September 2016, the index stands at around 3,650.

The capital value of the index has compounded at nearly 7% a year over the 54 intervening years, and that return takes no account of the additional rich flow of dividends paid by UK companies.

We can safely say that anyone who has expressed a pessimistic view about the long-term outlook for UK equities over most of that period has been just plain wrong.

What next?

A similar performance through to 2,070 would lift the index to around 134,000. Is that feasible? Well, one of my favourite quotes about the future comes from the historian Thomas Babington Macaulay.

What will drive the market higher is the emergence of major new firms, often in as yet unknown industriesWriting in 1830, he said: "By what principle is it that, when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?"

So why should it not be? Of course, as an investor, you want to know what is going to happen next, not over the next 54 years. What I always say to that is that I expect UK equities to be much higher in 10 years' time.

My view is that price/earnings ratios will shoot up, as real earnings growth accelerates. I also think quoted companies' capital intensity will decline as digital assets replace physical ones.

That's the good news. The less good news is that what will drive the market higher is the emergence of major new companies, sometimes in industries you and I haven't heard of. That will make picking winners trickier. I say this not as a futurologist making controversial guesses about a brave new world. I say it as a historian of markets.

Don't forget that technology is always as busy destroying companies as it is creating themFor 200 years or more, technology has been the engine that moves markets, to borrow the title of "Sandy" Nairn's excellent book (Engines that Move Markets).

People try to predict the stockmarket by watching interest rates, GDP or even politics. But they're looking in the wrong places. It is technology that is behind the successive waves of stockmarket returns.

We're lucky to be alive during a period of extraordinary innovation, but don't forget that technology is always as busy destroying companies as it is creating them. That's confirmed by the bewildering flux in the constituents of market indices over time.

Thought experiment

To get some idea of the scope of the changes that might unfold, consider the outlook for the 10 biggest members of the FTSE All-Share index today: two banks (HSBC and Lloyds), a tobacco firm (British American Tobacco), two big oils (Royal Dutch Shell and BP), three drug companies (GlaxoSmithKline, AstraZeneca and Reckitt Benckiser), a telco (Vodafone) and a distiller (Diageo).

What might peer-to-peer lending, vaping, solar energy, gene sequencing, free telephony and - who knows - even the legalisation of marijuana do to these mega-caps over the next decade?

We'll need regular shots of Johnnie Walker and Gaviscon to calm our nerves through the coming changes.

Nick Train is manager of the Finsbury Growth & Income trust.

This article was first published in our special publication 21: Twenty-one years of Interactive Investor. Download your digital copy for free here.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.