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How High (Or Low) Can The FTSE 100 Realistically Go This Year?

Having risen by 8% in the last year, the FTSE 100 is now trading at an all-time high of close to 7100 points. Clearly, improving investor sentiment has been a major reason for its surge through the psychological 7000 points barrier, with the long-term outlook for the global economy now being much brighter than it has been for a number of years.

However, does this necessarily mean that the UK’s leading index will now power ahead to 8000 points? Or, could it drop to as little as 6000 points before the end of the year?

Highly Appealing Stocks

Despite trading at a record high, there are a number of stocks on the FTSE 100 that continue to offer excellent value for money. Furthermore, the stocks that have the most appeal when it comes to valuations appear to be the so-called ‘mega caps’. This is crucial for the FTSE 100, since it is weighted by market capitalisation, which means that the bigger the company, the more impact it has on the wider index’s price level.

Furthermore, the major sectors in the FTSE 100 by market capitalisation, such as banking, mining and energy, have been hit the hardest in recent years. For example, low commodity prices have hurt the valuations of large companies such as BHP Billiton and Shell, while the banking sector continues to be pegged back by regulatory issues and PPI provisions. Therefore, the long term growth profile for the FTSE 100 appears to be very bright, with its major sectors seemingly offering considerable upside potential.

Interest Rates

The FTSE 100 could also benefit from a fall in interest rates. Just a year ago, the thought of interest rates being cut below 0.5% would have caused many investors to laugh out loud, since the UK economy was performing well and there were concerns that it may actually overheat due to a loose monetary policy. However, now that deflation is here (inflation was -0.01% in March) there seems to be more chance of an interest rate cut, rather than rise. And, as has been the case in recent years, the FTSE 100 is likely to surge if there is a fall in interest rates.

Challenges

Of course, the FTSE 100 could also be held back considerably this year. An uncertain outcome from the General Election (i.e. a minority government) is a very real threat to the UK’s main index, while further problems in the Eurozone could depress the share prices of UK banks as a result of the risk of contagion. And, even though deflation is being billed as a temporary phenomenon, history tells us that it can be a persistent problem that saps away at consumer and investor confidence over a prolonged period.

Looking Ahead

So, while there are clear reasons why the FTSE 100 could hit 8000 points this year, there are also downside risks that could easily knock 1000+ points from its value. However, for longer-term investors, now is a great time to invest due to the excellent value that is on offer and, should the FTSE 100 fall during the rest of the year, it will simply equate to an even more golden opportunity to buy high quality companies at very reasonable prices.

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Peter Stephens owns shares of BHP Billiton and Royal Dutch Shell. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.