At a crossroads: why the FTSE 100 could crash or rocket

The world is at a crossroads. On 23 June Britain will decide if it stays in or drops out of the European Union. Then, in November, the US will decide whether it will elect the publicity-hungry demagogue Donald Trump as president. Depending on these outcomes, global stock markets could crash or rocket.

This globalised world, increasingly dominated by countries like China and India, is changing rapidly. This has led to the dismantling of manufacturing industry in the States, and a consequent crash in employment numbers.

Populism is rampaging across this world

In Europe, a series of crises centred around the euro and debt have fuelled discontent in many quarters. Greece has been on the verge of tumbling out of the Eurozone countless times. This has led to the strengthening of extremist and populist groupings such as the National Front in France, and the UK Independence Party in the UK.

And with the announcement of a referendum on whether Britain should stay in the EU, the Conservatives have revealed their huge divisions on this subject. I believe, the consequences for this country dropping out of Europe are frightening, both for Europe, and for Britain. Global stock markets, including the FTSE 100, would crash.

In the American presidential election campaign it’s the populists who have been winning. Donald Trump has beaten the moderates all ends up. In a battle with the likely Democrat candidate Hillary Clinton, Trump’s brand of immigrant- and China-bashing stands a strong chance of beating Clinton’s mainstream policies.

It’s difficult to say whether Trump will be as extreme as a president as he has been during his campaigning, but I feel his aggressive posturing augurs badly for the standing of America in the world.

Yet there’s still hope

And yet there’s still hope. In Europe, I’m hopeful Britain will vote to stay in the EU. People will gradually realise their fears about the European project were overblown. The series of crises that reverberated across Greece, Portugal and Ireland were really about the unsustainable level of government debts, rather than about the euro. Having a zone with the free movement of capital, goods and labour, with one single currency, is actually a good idea, and one that unifies a continent with disparate languages and cultures.

If Britain were to leave Europe, many would ask: what would we have in its place?

Stateside, whether Donald or Hillary win, politicians may begin to realise that a better path would be the reflationary policies that have seen Japan return to growth. Immigration, and an overpopulated world, loom over both America and Europe. Its difficulties and consequences have now entered mainstream debate, and politicians are still grappling with the fallout from one of the defining issues of our age.

I think investors should be cautious, yet optimistic. If we stay in Europe, I expect the FTSE 100 and the pound will bounce. And whatever you think about the US presidential rivals, at least they’re starting to accept the difficulties that their country is facing.

Now they have to decide what to do about it.

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Prabhat Sakya 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.