MENU

Why The FTSE 100 Is Set To Disappoint

Now that the Greek debt crisis has reached a conclusion, investors should be breathing a sigh of relief, right? Moreover, shouldn’t the FTSE 100 quickly return to 7,000+ points and sail off into the distance, continuing the bull market that has been a feature of the last six years?

Unfortunately, neither of these questions can be answered in a straightforward fashion. For starters, the Greek debt crisis may be over for now, but there is still a good chance that at some point further down the line the country will struggle to repay the full extent of its debts, with a haircut likely to be required. This would undoubtedly knock investor sentiment and hurt the price level of the FTSE 100, as well as hurt the balance sheets of a number of banks, both in Europe and across the globe.

Furthermore, the FTSE 100 remains at around 6,800 points and has shown little indication of a move upwards since a deal was reached between Greece and its creditors. A key reason for this is an expectation that at some point in the next six months the long-awaited move upwards in interest rates in the US and UK will commence. While this indicates that policymakers are finally convinced that the worst of the global financial crisis is over, it is likely to dampen investor sentiment since a rising interest rate makes saving more appealing, spending less appealing and generally acts as a brake on the performance of the economy.

Therefore, the short-term outlook for the FTSE 100 may be rather disappointing and investors who are anticipating a new all-time high in the second half of 2015 may be somewhat disappointed. Certainly, a major fall is now much less likely following the Greek deal, but equally a sharp rise in the index’s level seems difficult to envisage in the short run.

Despite this, now is a great time to invest in shares. For starters, the income element of total return is likely to beat anything else that has a similar (or lower) risk profile, with net yields (for basic rate taxpayers) of 4%+ being relatively easy to find. Even many utility companies are yielding more than that and, while interest rates may cause their interest costs to rise (and those of other highly indebted companies), they remain hugely defensive and solid investments for the long run.

Looking further ahead, the news for the FTSE 100 is likely to be positive. Certainly, the boom of the last handful of years may not return for a short while, since the boost from quantitative easing and an ultra-loose monetary policy is now set to finally end, but an improving global economy should mean a more gradual and sustainable rise in the index level seems to be on the cards in 2016 and beyond.

Therefore, patience looks set to be rewarded, with the next six months providing the perfect opportunity to add high-quality stocks at fair prices to your portfolio, in time for what appears to be a very bright long-term future for the FTSE 100.

With that in mind, the analysts at The Motley Fool have written a free and without obligation guide called 5 Shares You Can Retire On.

The 5 companies in question offer stunning dividend yields, have fantastic long term potential, and trade at very appealing valuations. As such, they could deliver excellent returns and provide your portfolio with a major boost in 2015 and beyond.

Click here to find out all about them - it's completely free and without obligation to do so.

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.