It’s been a highly uncertain period for investors in recent weeks. Indeed, the FTSE 100 has plunged by 399 points in the last five weeks alone and, if it continues at the same rate moving forward, it could be trading below 6,000 points by mid-November. This would be the first time since 2012 that the FTSE 100 traded below 6,000 points.
However, even if it does drop to below 6,000 points, investors shouldn’t panic. Indeed, it could be a superb buying opportunity. Here’s why.
Eurozone Problems
A major cause of the current uncertainty in the FTSE 100 is continued problems in the Eurozone. While the UK and US Central Banks have pumped large amounts of money into the economy via their quantitative easing/monthly asset repurchase programmes, the ECB has done little in comparison to encourage growth and stave off a period of deflation.
This now looks to be causing issues not only for the region’s GDP numbers, but also for US and UK companies that are operating within the single currency region. As a result, earnings figures could disappoint in the short term, which is causing investor sentiment to weaken and send index levels lower.
Monetary Policy
Of course, the recent Fed minutes show that it is unwilling to raise interest rates until the macroeconomic outlook improves. This should provide support to the US and UK index levels moving forward, but may not be enough to prevent the FTSE 100 from pulling back further – especially if Eurozone numbers continue to disappoint in the short term.
Looking Ahead
Despite this, a further fall could prove to be a blessing in disguise for most investors. That’s because it is likely to be a temporary blip, since (as mentioned) Central Banks now seem to be willing to stick with an ultra-loose monetary policy for as long as is necessary. Even the ECB is now coming round to the idea that deflation poses a far greater risk than inflation, and so it appears ready and willing to conduct its own model of asset repurchases.
As a result, stock markets and the global economy should deliver strong growth over the medium to long term. Certainly, there will be lumps and bumps ahead and 6,000 points is a realistic level before Christmas. However, as the goal of all investors is to ‘buy low and sell high’, the present time provides the perfect opportunity to ‘buy low’, safe in the knowledge that Central Banks around the world will step in if asset price declines become too much to bear.
