The FTSE 100 stormed past 7,000 points for the first time in its history in April 2015. This was greeted by intense optimism by most investors, since back then the outlook for the UK and global economy was relatively positive.
Certainly, there was the looming General Election in the UK, but China was on course for a soft landing and US interest rate rises still felt like some way off. As such, there was a general expectancy among investors that after 7,000 points it wouldn’t take too long for the FTSE 100 to reach 8,000.
However, the FTSE 100 only stayed above 7,000 points for a matter of weeks. Since then it has fallen to as low as 5,700 points, before recovering to now reach 7,000 points once more. Unlike last time, though, there are a number of risks which could mean that 8,000 points is again not just around the corner.
Chief among them is a US interest rate rise. This seems to be a case of ‘when’ rather than ‘if’, since the Federal Reserve seems to be in a more hawkish mood than earlier in the year. Therefore, a rate rise before Christmas seems very likely, which could negatively impact on the performance of the 100 index. That’s largely because of fears surrounding the performance of the US economy, with a higher interest rate having the potential to choke off its economic recovery and also make deflation more likely.
In addition, the US election poses a risk. Donald Trump could still win, which would cause a considerable amount of uncertainty, given the potential for a major change in policy stance. As a result, riskier assets, such as shares, would be likely to perform less well. Similarly, Eurozone challenges from Brexit and a continued slowdown in China may mean that the FTSE 100 is pegged back somewhat over the coming months.
However, that doesn’t mean investing in the index should be avoided. A weaker pound is helping to provide a boost to FTSE 100 companies that operate outside of the UK but which report in sterling. This trend is likely to continue since a US interest rate rise should boost the value of the dollar and confidence in the UK economy could continue to fall as Brexit talks commence in 2017.
So the FTSE 100 still has long term appeal. Its performance in the near term may be volatile, but this provides an opportunity for long term investors to buy high-quality stocks at discounted prices. The index may not reach 8,000 points this year because of to the risks mentioned above, but with a yield of 3.6%, versus 2.2% for the S&P 500, it seems to offer good long term value for money at the present time.
