Will Falling Oil Prices Boost The FTSE 100?

If Marty McFly suddenly appeared from 30 years ago in his bashed-up DeLorean, in a cloud of smoke and gasoline fumes, he would be amazed by some of the things he saw. Instead of those bulky old TV sets, we now had sleek panes of glass that light up to show TV pictures of startling beauty. Instead of traditional telephones, we talked to each other through multi-coloured rectangles of glass and metal. And guess what? That great demon inflation was no more.

Inflation used to be the scourge of Western economies

Inflation used to be the scourge of Western economies. The value of people’s savings and investments was steadily eroded. It reduced consumers’ spending power. Governments tried everything to tackle inflation, from cripplingly high interest rates to wage controls and pay freezes. Even as recently as the early 1990s, high inflation triggered recession.

But one of the main trends of recent decades has been globalisation. This has rapidly expanded the world’s production capacity, and means we now live in an era of low inflation. It is no coincidence that this is a time where global wealth is growing faster than ever, and global poverty is falling.

The most dramatic economic event of recent months has been the end of the commodities supercycle, leading to tumbling oil, gas and mineral prices. This will add further downward pressure on prices. It will be cheaper to travel, to heat your home and to shop at the supermarket. This is a very positive trend, which will boost the economy and businesses. I expect stock markets around the world to rise.

Economies and stock markets around the world will benefit from low inflation

Of course, you can have too much of a good thing, as inflation can fall so quickly it can turn into deflation. But central banks around the world have the armoury to combat deflation, notably quantitative easing (QE).

One of the regions at greatest risk from deflation is Europe. But finally, finally, the Eurozone is introducing QE. This may, at last, wake Europe from its slumber. And this will benefit the UK as well, as this flood of billions of euros will have a reflationary and pro-growth effect. Stock markets will be further boosted.

What’s more, as stock markets rise, low inflation will mean that the real return on our investments will that much higher. However, this might be the time to pick your stocks rather than buy a FTSE 100 tracker, as the index will be weighed down by resources companies, which make up 23% of its market capitalisation.

Thus, as we peer through this January gloom, there are many reasons to be cheerful. And there has been no better time to invest.

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