FTSE 100: next stop 7,000 or 5,000?

It’s a tough time to be an investor. Volatility prevails in markets around the world as traders concentrate on deteriorating global economic fundamentals, China’s growing debt problem, and the Federal Reserve.

Meanwhile, here in the UK the EU referendum on 23 June is at the forefront of investors’ minds as they try and prepare for every eventuality.

With so much uncertainty clouding the outlook for markets around the world, it’s difficult to try and predict what the future holds for any of the world’s major stock indexes. And trying to predict how the FTSE 100 will react to global economic headwinds is almost impossible.

A global index

More than two-thirds of FTSE 100 profits come from outside the UK, so the index is extremely exposed to any economic tremors from the global economy. What’s more, the threat of Britain leaving the EU is enough for international investors to reconsider their decision to invest in the country.

Indeed, investors’ number one enemy is uncertainty, and if ‘vote leave’ wins the vote in two weeks’ time, there will be several years of uncertainty as lawmakers thrash out the details of what could become a very messy divorce. During this period of uncertainty, it’s more than likely that most international investors will decide to divest their UK holdings and wait for the dust settle before re-entering the market.

If it’s decided that the UK should leave the EU, in the near-term the FTSE 100 could slump to 5,000 as those investors rush to pull their money out of the country.

On the other hand, if the UK population chooses to remain in the EU, a flood of money could enter the country as the veil of uncertainty is lifted. If this scenario unfolds, it’s likely that the FTSE 100 could return to its five-year high of 7,000. There’s a chance the index could push even higher if global economic growth picks up over the next 12 months.

Look to the long-term

So overall, it’s almost impossible to try and estimate where the FTSE 100 will be three months from now. But while the index’s value may fluctuate significantly around the EU referendum as a long-term investment, the FTSE 100 still looks attractive. The index currently supports an average dividend yield of 3.95% and by using a low-cost tracker fund, investors can pick up this yield as well as the diversification that comes with the index for a fraction of the price of an actively-managed income fund.

For example, the Blackrock 100 UK Equity Fund charges 0.07% to track the UK’s leading index while the Legal & General UK 100 Index fund charges only 0.1% per annum or 0.06% if held through an account at Hargreaves Lansdown. In comparison, four of the UK’s top income funds, Woodford UK Equity Income, Threadneedle UK Equity Alpha Income, Rathbone Income and Standard Life Equity Income Trust support an average dividend yield of 3.8% and charge an average annual management fee of 0.85%. In other words, by choosing an income fund over a FTSE 100 tracker, after including charges, the effective yield falls to 2.95% compared to 3.88% for the Blackrock FTSE 100 tracker.

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Rupert Hargreaves 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.