After hitting a new all-time high of 7,430 last week, the UK’s leading index the FTSE 100 has weakened in recent days, following global markets lower as investors start to doubt the likelihood that Donald Trump’s proposed reforms will actually be carried out.
Reform failure
Trump’s attempt at reforming the US healthcare system fell flat, which has thrown into doubt his ability to be able to carry out other economic and political reforms. Since Trump’s election at the beginning of November, global markets have surged, off the back of Trump’s economic promises, and further gains are reliant upon his ability to turn these promises into reality.
Unfortunately, for the time being it looks as if Trump’s plans have been put on ice and this is bad news for equities.
As well as political headwinds, the FTSE 100 is also coming under pressure from the rising value of sterling. Better than expected UK economic data, coupled with a weakening US dollar has sent the GBP/USD exchange rate back to 1.25, up from a low of 1.21. A weaker pound had been propping up the FTSE 100, as weaker sterling translates to higher earnings for the 70% of the index’s constituents that generate the majority of their income overseas.
Impossible to predict
Trying to accurately predict the movement of stock indexes is impossible, but if Trump continues to flounder, and sterling continues to strengthen, then it is reasonable to suggest that the FTSE 100 will give up more of its recent gains as investors reconsider their position.
However, for long-term investors any pullback could be a great opportunity to increase equity exposure. Recent gains have driven stock indexes around the world to record highs and record valuations, which has dramatically decreased the appeal of stocks. Research has shown that higher valuations generally mean lower long-term returns. No investor wants to confine themselves to years of low returns.
Some equities are better positioned than others to weather any declines. Shares in commodity producers such as Glencore, for example, tend to track commodity prices rather than equity markets, and with economic growth around the world picking up, the outlook for commodity prices is bright.
Other companies that have missed out on the recent rally also look to be attractive investments to ride out any volatility — businesses such as British Land and EasyJet. Furthermore, traditional defensive stocks such as British American Tobacco, Diageo and GlaxoSmithKline remain attractive investments for any market environment. Even though these businesses may suffer from stronger sterling in the near term, over the long term earnings growth will likely remain robust and there’s little risk of permanent capital impairment.
The bottom line
All in all then, as political uncertainty grows the FTSE 100 could fall further from its all-time high. But for the long-term Foolish investor, losses will only present opportunities to increase positions in the market’s leading businesses.
