What will the FTSE 100 do in 2021?

2020 has been a rough year for the FTSE 100, but I think the index will be heading higher in 2021. Here’s why.

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What will 2021 have in store for the FTSE 100? Well, at the time of writing, the index is around the 6,600 point level. I won’t try (and fail) to get the number right for the end of 2021. Predicting whether the FTSE 100 will be higher or lower than now in a year will serve my needs.

I think the FTSE 100 will be higher at the end of 2021 than it is now. The reasoning is simple: FTSE 100 company profits should be higher on aggregate in 2021 than 2020.

FTSE 100 earnings

In 2019, pre-tax earnings for all FTSE 100 companies was £169bn. The lowest the FTSE 100 got in 2019 was 6,809. It hit a high of 7,645 just before the year ended. Pre-tax FTSE 100 earnings are reckoned to have fallen to £122.2bn in 2020. During 2020, the market crashed to a low of 5,191. So far, a post-crash high of 6,550 has been the best the index could manage.

A consensus forecast of £166bn in pre-tax earnings for the UK’s main index in 2021 bodes well for its level in the new year. In being comparable to 2019’s earnings, a move into the 6,809 to 7,645 range seen during that year would be justified for the FTSE 100 in 2021. But, that would depend on the consensus earnings matching reality.

An end to the pandemic and Brexit

When analysts make earnings predictions, they have scenarios in mind. The consensus scenario (and the pre-tax profits attached to it) appears to include a deal being reached in the Brexit negotiations and an epidemiological end (herd immunity) to the coronavirus pandemic sometime in the second half of 2021.

For the consensus forecast for pre-tax earnings to resemble reality and predictions for the FTSE 100’s level in 2021 to hold any water, the scenario must also hold. A no-deal Brexit has already been avoided, removing a big risk for the market. Zero tariffs and zero quotas on goods trade have been secured bilaterally. However, arrangements for services, in particular financial services, are lacking. There will be further negotiations on the services front, and the markets have reacted positively to the deal.

On the pandemic front, vaccines are starting to be deployed. A return to normality in 2021 is possible so long as enough vaccine doses are available and enough people take them.

A shot in the arm for the FTSE 100

According to surveys conducted by YouGov, 67% of the UK public are either very or fairly likely to take a coronavirus vaccine when available. This data was collected in November 2020 and concerned the Pfizer/Bio vaccine in particular. Around 12% of people did not know whether they would or not.

Of the 21% who say they won’t, about 10% wanted to wait and see if the vaccine is safe. Another 4% didn’t trust a particular vaccine, and 3% think they don’t need vaccination because they are low risk. Just, 2% were opposed to vaccinations in general.

If the communication is right, then take-up of the vaccine, at least among adults, could be well above the levels needed to achieve herd immunity given the effectiveness demonstrated in trials. With the AstraZeneca/Oxford vaccine edging closer to approval, there is reason to believe there will be enough doses and willing recipients to see the second half of 2021 look much more like normal.

I do therefore believe that the FTSE 100 will move higher in 2021.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James J. McCombie owns shares in YouGov. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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