With the FTSE 100 having surpassed its all-time high in recent weeks, shares are very much back on the agenda for a lot of people. Certainly, this is a good thing, since investing in shares has been shown to offer the most appealing long-term returns out of any major asset class. Furthermore, with them being so accessible today because of the internet, buying and selling stakes in companies also requires comparatively little time.
Looking ahead, though, there remain a number of challenges on the horizon and, even though the economic outlook is generally positive, should you really buy the FTSE 100 while it sits at or near its all-time high? Or, should you wait for a more appealing price level before investing your hard-earned cash?
The Bear Case
With the UK General Election just two months away, there is likely to be a considerable amount of uncertainty in the stock market in the short run. And, if there is a change in Prime Minister, the FTSE 100 is likely to fall somewhat, since investors tend not to like sudden change and uncertainty. As such, the short run could see the FTSE 100’s price level come under pressure.
In addition, there remain a number of global economic and political challenges that are yet to be worked through. The main one in terms of its impact on the FTSE 100 is the Eurozone economy, with the single currency region continuing to post only anaemic growth numbers and being stuck in an economic decline that has not abated since the start of the credit crunch. And, with the threat of a prolonged period of deflation ahead, things could get worse before they get better and this will undoubtedly impact negatively on the FTSE 100.
Meanwhile, tension between Russia and the West regarding Ukraine could escalate and, with there being considerable uncertainty regarding the Middle East (notably the conflict in Iraq and the question of Iranian nuclear power), these challenges could pose a threat to the FTSE 100’s price level during the course of the year. Furthermore, with the Chinese economy still enduring a ‘soft landing’, global economic growth numbers could disappoint and cause the FTSE 100 to fall.
The Bull Case
However, the problems described above are not particularly new or unusual. In other words, the FTSE 100 has faced a multitude of challenges in the past and yet has still been able to deliver excellent long-term returns. Certainly, there are a number of risks currently facing the future performance of the index but, as history has shown, many of these may already be priced in and, should they prove to be less severe than anticipated, could mean that the FTSE 100 performs much better than is currently expected.
For example, if David Cameron remains as Prime Minister, the Eurozone’s QE package succeeds in breathing life into the slowest-growing region in the world, and China continues to cut interest rates in a bid to stimulate its economy, then the FTSE 100 could make substantial gains in the short run. In other words, those same risks could prove to be catalysts for the UK’s leading index.
Looking Ahead
Of course, the future is impossible to predict and, as Warren Buffett famously said when discussing the idea of trying to time the market, “it’s a terrible mistake to try and dance in and dance out of it”. In other words, trying to buy when the market is low and sell when it is high is not a good idea.
So, while the FTSE 100 comes with real risks, it also offers vast returns. As such, now seems to be as good a time as any to invest your hard-earned cash in a diverse range of companies for the long term.
