Why the FTSE 100 at 7,000 by Christmas seems likely

This is a market you don’t want to be out of, argues Kevin Godbold.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Respected fund manager Neil Woodford thinks Brexit is a bit of a sideshow for Britain, arguing that global events will shape the country’s medium- to-longer term prospects.

I think Neil Woodford is one of the main voices of reason regarding Britain’s relationship with the EU, and he influenced my decision on which way to vote in the referendum when he commissioned and published a study suggesting the economic consequences of Brexit would be neutral.

Viewed in that way, market madness around the world now looks like more of an opportunity than a threat and as things settle down I reckon the FTSE 100 will surge to 7,000 and beyond, perhaps by Christmas.

Strong defensives

One prominent effect of Britain’s vote to leave the EU is the way the pound crashed when measured against other currencies such as the US dollar and the euro. That pushed share prices up for firms trading internationally because foreign earnings are worth more when converted back to pounds. Many of the companies populating the FTSE 100, for example, report their revenues and earnings in sterling, so they’ve benefited from this perhaps-one-off currency conversion boost.

However, I think there’s more to recent share price rises than mere currency advantage. We seem to be witnessing a flight to quality. many of the firms shooting up on the London stock market now are internationally-facing, true, but they also tend to operate in defensive sectors such as consumer goods, pharmaceuticals and utilities. In times of economic uncertainty, such sectors look like safer places and I reckon share prices are likely to continue their move in those areas for a while yet, driving the FTSE 100 upwards.

Resurgent cyclicals

Meanwhile, it will probably dawn on investors that the fallen UK-facing cyclical sectors are looking oversold if Neil Woodford’s theory about Sideshow Brexit proves correct, as I believe it will. The Brexit process seems likely to grind on for years and, as it does so, uncertainty will diminish. After all, Britain’s trading terms with Europe will remain the same as they are now until the two-year renegotiation process is complete — and the government has yet to trigger Article 50 of the European Union’s Treaty of Lisbon to get the countdown started. Investors will likely re-buy UK-facing cyclicals driving them back up for at least part of the ground lost in the recent sell-off.

Good liquidity

The combined effect of rising defensives and resurgent cyclicals should power the FTSE 100 to 7,000 and beyond as long as nothing detrimental happens in wider world events and macroeconomics.

One reason I’m confident is the situation with regard to investor liquidity. During the global financial crisis of 2008/09, the flow of money in the economy seized up. That’s why shares crashed so far — nobody could put their hands on any money to invest. Today, the situation is different. Companies, investment institutions, rich private investors, and banks are all awash with capital free to invest.

Liquidity is high and I think investors will likely snap up cheap-looking assets such as shares, property, bonds and commodities, thus snuffing out any momentum that might gather on the downside. To me, this is a market you don’t want to be sitting out of.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »