My FTSE 100 Prediction For 2016

2015 has been a historic year for the FTSE 100. That’s because it finally broke through the elusive 7,000 points barrier that it had come ever-so-close to reaching a long ago as 1999 and again in 2007.

This year, though, the UK’s major index broke through the key psychological level and, as a result, many individuals started to become rather excited about its potential for reaching 7,500 points or even 8,000 points in 2015.

However, their optimism was to be short-lived. The FTSE 100 has collapsed in recent months, driven down by tumbling commodity prices, worries about a US interest rate rise, and fears surrounding China’s slowing growth rate. As such, the FTSE 100 is currently sitting on a capital loss of 8% in 2015, which is its worst calendar year performance since 2008.

In many ways, though, 2015 has felt akin to 2007 in terms of the nervousness of investors and the degree of fear present in the investment world. In 2007, the FTSE 100 endured a 10% correction in February and was exceptionally volatile for the remainder of the year, as the outlook for the global economy — particularly the banking sector — worsened. However, the FTSE 100 still managed to finish up 4% in 2007, which is a significantly better performance than 2015 and shows just how bad this year has been.

Despite this, 2016 is unlikely to be anything like 2008. That year, the FTSE 100 fell by 35% and was akin to watching a slow-motion car crash. And, while there are risks to the FTSE 100, such as a continued fall in the price of commodities, a slowing Chinese economy and the impact of rising interest rates, the index appears to be in great shape to deliver excellent capital gains in 2016 and beyond.

That’s because the macroeconomic outlook for the US, UK, Europe and China remains relatively upbeat. In the case of the US and UK, economic growth is strong and, while tightening of monetary policy  is very likely to occur in 2016, its scale and speed is unlikely to derail the growth rate of GDP.

Similarly, the Eurozone is still struggling to grow, but with the ECB stating that further quantitative easing is an option in 2016, it is likely to gain a boost even if its short term performance disappoints. And, while China’s growth rate is slowing, it is still a rapidly expanding economy that presents huge opportunities for growth in consumer goods, financial products and consumer services in 2016 and beyond.

Furthermore, the FTSE 100 appears to offer excellent value for money at the present time. For example it yields almost 4% and has a price to earnings (P/E) ratio of around 13. Both of these numbers compare very favourably to the S&P 500’s yield of 2.1% and P/E ratio of 18.7, indicating that the FTSE 100 has scope to rise in 2016.

In fact, if the FTSE 100 were to trade at 7,000 points, it would still have a relatively enticing yield of 3.5% and a rating of around 15. As such, 7,000 points looks set to be hit once again in 2016, but this time the FTSE 100 may pass through and never fall back, thanks to the bright long-term outlook for the global economy. Buying high quality companies now therefore appears to be a sound move.

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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.