With the FTSE 100 trading at a lower level than it was at the turn of the century, many investors may be somewhat sceptical about its prospects for reaching 10,000 points. After all, the UK’s leading index has hardly been a capital gains success story during the last decade and a half, with a number of crises such as the dotcom bubble, 9/11, the credit crunch and commodity crisis causing the index to disappoint.
However, the prospects for the FTSE 100 could be a lot brighter than many investors realise and it could reach 10,000 points within eight years. That may sound a little optimistic or even far-fetched given its roughly 1% fall in the last six months. However, 10,000 points is very realistic and more importantly, the index would need to record only average performance over the next eight years to reach five-figure status.
That’s because since its inception in 1984, the FTSE 100 has risen at an annualised rate of 5.9% excluding the impact of dividends. Using the same rate of growth over the next eight years would equate to a capital gain of just over 58%, which would be sufficient to propel the index all the way up to 10,000 points.
Catalysts
Clearly, to achieve that level of growth is likely to require positive catalysts. One potential catalyst is a recovery in the natural resources sector. With 17.5% of the FTSE 100 being made up of resources companies, it remains a key driver of the index’s returns. And while the oil price is still well below its previous highs, it’s gradually recovering and alongside other commodities could continue to do so in the medium-to-long term. That’s largely because of the forces of supply and demand, with it being uneconomical for a number of higher-cost producers to remain in business when profitability is so tight.
Another potential catalyst to push the FTSE 100 to 10,000 points is the performance of the global economy. With the US economy moving from strength to strength and unlikely to be weighed down by rapid interest rate rises, its future growth prospects appear to be sound. While the Chinese economy is posting GDP figures that are lower than in recent years, it continues to offer stunning long-term growth potential as it transitions away from a capital expenditure-led economy and towards a consumer-led economy.
Meanwhile, the Eurozone may also record better performance in the next eight years than is currently being priced in to the FTSE 100. Quantitative easing could help to stimulate demand and improve the anaemic levels of growth that have been present in recent years. And with the UK economy also performing relatively well and set to be aided by a continued dovish monetary policy by the Bank of England, the prospects for the FTSE 100 reaching 10,000 points could be much better than many investors realise.
