Why The FTSE 100 Is Set To Return To 7,000 Points This Year

When the FTSE 100 cruised past 7,000 points last year, many investors wondered whether the UK’s leading index would ever fall beneath that level. After all, 7,000 points had been a long time coming. The index had come within 5% of that psychological line at the end of 1999 and spent the next 15 years flirting with the idea of passing it. So upon its move above 7,000 points, it seemed as though a new era had begun.

However, this idea was quickly destroyed as the FTSE 100 moved sharply lower last year and even traded below 6,000 points for a time. And while it’s still currently closer to 6,000 points than 7,000 points, its medium-term prospects appear to be rather bright, with it having the potential to move past the latter level by the end of 2016.

Global economy

A key reason for this is an improving global economy. Certainly there are risks ahead, including the potential for a Brexit, concerns surrounding additional US interest rate rises and a slowing Chinese economy. However, the market appears to have fully priced-in such challenges and this makes the FTSE 100 appear to be extremely appealing at the present time.

For example, US interest rates may be on the up, but the chances of them choking off the economic recovery that has taken hold in recent years appear to be slim. That’s at least partly because the Federal Reserve has stated repeatedly that it intends to raise rates at only a very slow pace. This should ensure that there are no major shocks regarding monetary policy moving forward, which should help to positively catalyse job creation and consumer confidence.

China, stronger than we think?

Similarly, the Chinese economy may also be in a stronger position than many investors currently realise. Of course, it’s recording lower GDP growth than it has done for a number of years, but the reality is that China is transitioning towards a more consumer-focused economy. In the long run, this should allow it to deliver upbeat GDP growth numbers and while it’s likely to cause some turbulence in the short run, this doesn’t mean that long-term investors in the region should be worried. In fact, in consumer services and financial services, China remains hugely enticing at the present time.

Meanwhile, the potential for a Brexit remains very real. Although the polls may indicate that one side or the other has a lead, it really could go either way. Clearly, a ‘remain’ vote would be likely to lead to a short-term boost for the FTSE 100, since investors tend to fear change. But a ‘leave’ vote may not cause the scale of economic problems that many investors currently fear, although it would be very likely to mean increased volatility and uncertainty in the short run.

As such, with the FTSE 100 yielding just under 4% and trading well below its all-time high, now seems to be an opportune moment to buy for the long run. Although it comes with a number of risks and volatility may remain high, the FTSE 100 could easily sail past 7,000 points before the year is out.

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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.