The 3 Biggest Risks To The Future Of The FTSE 100

These 3 factors could spell disaster for the FTSE 100 (INDEXFTSE:UKX)

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

US Interest Rates

The old saying that when America sneezes, Europe catches a cold may not be quite as true as it once was, since the emergence of China as the world’s second largest economy. However, a pullback in the world’s largest economy would still cause major problems for the FTSE 100 and, while the US continues to post relatively strong economic data, over the next few years things could change.

The major reason for this is the prospect of interest rate rises. Certainly, the FTSE 100 and S&P 500 have responded fairly positively to the end of the Federal Reserve’s monthly asset repurchase programme, but interest rate rises could be a different story. For starters, they could hurt market sentiment, as investors look back on a ‘once in a generation’ opportunity to invest while interest rates were near-zero and instead look forward to a long and arduous road back to normality (i.e. 4%-5% interest rates).

Furthermore, with US inflation still being below the Federal Reserve’s 2% target, interest rate rises could be viewed as pre-emptive and make the risk of deflation even greater. As such, an orderly interest rate rise may not be achievable.

Eurozone Problems

While the ECB has finally gone ahead with a programme of quantitative easing, there are no guarantees that it will work. After all, it still fails to address the imbalances that exist across Europe, with it likely to continue to be something of a two-speed economy, split between the north and the south.

And, with a Greek exit from the Euro still very much on the cards, things could get worse before they get better for the Eurozone. This would have a major impact upon the FTSE 100, since many of the index’s constituents are heavily reliant upon the region for their earnings, while investor sentiment could quickly change from optimism to fear if first Greece, and then possibly other countries, begin to exit the single currency.

General Election

Whether Mr. Cameron or Mr. Miliband occupies 10 Downing Street after next week, the future for the UK economy is likely to be very uncertain. If the former stays put, we are likely to have a period of time where there is the potential for the UK to exit the EU. This could cause a reduction in inward investment to the UK and also force investor sentiment to decline, thereby hurting the FTSE 100’s price level.

Similarly, if Mr. Miliband become Prime Minister, then the impact of his taxation and wealth distribution policies could be significant. For example, the mansion tax could cause a weakening of the housing market, less flexible labour laws could mean fewer jobs are created, while a general uncertainty among business leaders regarding his future policies on wealth redistribution via higher taxation could lead to lower levels of investment in training, plant and machinery. In turn, this could hurt the performance of the FTSE 100 over the medium term, as the UK becomes a less favourable place to invest.

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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »