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Why The FTSE 100 Could Reach 8,000 Points By Year-End!

With the benefit of hindsight, Thursday’s majority victory for the Conservative party was rather obvious. After all, David Cameron was streets ahead of Ed Miliband in terms of his personal rating among voters, while the Conservatives were also seen as the more trustworthy party when it came to the economy, too. As such, a majority victory should perhaps have been the expected result – even if the polls were saying that it was neck and neck right until the last moment.

Improving Outlook

The reaction of the FTSE 100 to the result has been hugely positive, with it rising by 150 points since its close on Thursday. A key reason for this is the stability that comes with having the same government – especially one that has delivered an improving outlook for the UK economy over the last five years.

For example, in 2010 there was genuine concern that the UK could join a list of European countries for whom the future looked decidedly bleak, with a relatively high level of debt and a considerable deficit causing investors to become increasingly cautious regarding the prospects for the UK economy. However, today the UK is one of the fastest growing economies in the developed world and, while there is still some way to go before the deficit is reduced to zero, there is a clear path to achieving that objective over the course of the next parliament.

And, with the Conservatives unlikely to implement any radical policies such as a mansion tax, a tougher energy regulator or higher government spending over the next five years, the outlook for the UK economy remains relatively bright, which should provide a boost to the FTSE 100 over the medium to long term.

Relative Value

Of course, in the shorter term the FTSE 100 should also gain a boost from the erosion of the uncertainty discount that has been built in to the index’s valuation for some time. For example, while the FTSE 100 has a price to earnings (P/E) ratio of around 16, the S&P 500 has a P/E ratio of just over 21. Certainly, the US economy is performing well, as evidenced by the fact that it is considering an interest rate rise in the near future, but the FTSE 100 appears to offer excellent value for money on a relative basis, which could allow it to increase its valuation during the course of 2015 and beyond.

Looking Ahead

Clearly, moving from 7050 points to 8000 points is a major step. After all, it took the FTSE 100 around 15 years to reach 7000 points after first hitting 6000 points last century. However, it may not prove to be such a major leap this time around. That’s because the UK and global economies are on the up, with the Eurozone implementing QE and China set to provide a stimulus to its economy over the medium term.

Contrast this with the fallout from the tech bubble and 9/11 (both of which hurt the FTSE 100’s progress in the early 2000s) and it is clear that 8000 points may not prove to be so challenging for the FTSE 100. After all, it is just 13.5% from the index’s current level, with the FTSE 100 having risen by half that amount in the last six months alone.

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Peter Stephens has no position in any shares mentioned. 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.