A rise of just 1% will see the FTSE 100 (INDEXFTSE: UKX) reach the all-important psychological level of 7,000 points. It has only been higher than this level for around six weeks in its entire history. This occurred in April/May last year, but since then it’s been a disappointment and fell to a low of 5,700 points earlier this year.
In the short run, this disappointment could continue. Over the coming months there are three major challenges that could cause it to fall dramatically in value.
Brexit
The most obvious catalyst to push the FTSE 100 lower is Brexit. Investors and the general public seem to have moved on from the shock of the vote, but the reality is that it’s likely to begin to dominate news headlines once more later this year. That’s because Theresa May is set to invoke Article 50 of the Lisbon Treaty within the next six months and this will kick off a period of intense negotiation that will ultimately see the UK leave the EU within two years.
During this two-year period, it’s likely that both sides will take a tough negotiating stance (in public at least) and this could cause great uncertainty over how a post-EU UK will operate. Then, once the two-year period is up, the UK will finally go it alone. This could prove to be an even more uncertain time that may negatively impact on the FTSE 100.
US Election
There will be a new US president in place within six months and whoever wins, there will be uncertainty. Clearly, Hillary Clinton will have policies that are more similar to those of the incumbent, but even so, she’ll still bring change. And Donald Trump would be an even bigger step into the unknown.
As ever, investors fear change and this could cause global investors to adopt a more risk-off attitude. This may end up with lower-risk assets such as bonds and gold becoming increasingly popular, with equities likely to seem less favourable from a risk/reward perspective. This would hurt the performance of the FTSE 100, although more defensive stocks such as tobacco, utilities and healthcare could still perform relatively well.
US interest rate rises
However, the major catalyst on the FTSE 100’s performance is likely to be a rising US interest rate. Although only one rate rise is now predicted over the next 12 months, it’s likely to cause investors to become increasingly cautious regarding global economic growth.
That’s because a higher interest rate makes borrowing (and therefore spending) less appealing, while saving is more attractive. This could cause a slowdown in US growth rates, which would negatively impact on the global outlook and on the FTSE 100. Furthermore, interest rate changes take six-to-12 months to have an impact, so once an upward move is effected by the Federal Reserve, investors could remain nervous for a prolonged period.
As such, the FTSE 100 could fall in the short run. But with it still yielding 3.5% and the long term future for the UK and global economies being bright, it continues to be a sound buy for long-term investors. Certainly, it’s likely to be volatile and any falls could indicate excellent buying opportunities for the long term.
