2015 has been a rather interesting year for the FTSE 100. Despite there being over three months left of it, the year has already seen some major ups and downs which have caused it to drop from its opening level of 6566 points to its present day level of 6120 points.
However, its range has been much wider. The FTSE 100 has traded as high as 7100 points and as low as 5900 points, with the outlook for the global economy changing fast during the course of the year.
While a few months ago there was optimism among investors regarding both the growth prospects for the developed and developing world, today there is a degree of fear surrounding the future of Chinese growth as well as the impact that a rising interest rate will have on the US and UK economies.
Clearly, the short term prospects for the FTSE 100 are highly uncertain and, realistically, it could easily close above or below the psychological 6000 points level. Risks to the downside include further deterioration in Chinese economic data, as well as the potential for a raising of interest rates on both sides of the economy. In addition, the Eurozone continues to be a drag on global growth and, with Greek elections yet to come, further challenges could be just around the corner.
However, investors may also come to the conclusion that global growth is still healthy and, while China may not deliver double-digit growth anytime soon, 7%+ annual growth is still very appealing. In addition, the US and UK economies are the healthiest they have been in a number of years and, in the Eurozone, its adoption of quantitative easing could make a positive impact on its members’ economic performance in the months ahead.
For long term investors, though, whether the FTSE 100 is above, below or at 6000 points come the end of the year is of little significance. The key for them is that the index remains exceptionally good value compared to other assets. For example, bonds remain unattractively priced due to the impending interest rate hikes, while property is undoubtedly in a bubble which may not burst, but is likely to fail to grow significantly in the coming years.
The FTSE 100, on the other hand, offers a yield of just under 4% and, crucially, there are a number of very financially sound businesses with bright future prospects which trade on relatively low valuations.
Certainly, there is the potential for their prices to move substantially lower in the short run and, by investing now, it is possible that short term paper losses will be experienced. However, in the long run, the FTSE 100 appears to be highly appealing on both a relative and absolute basis. Furthermore, it has the scope to easily soar past its previous all-time high of 7100 points in 2016 and beyond.
