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Will Trump and Brexit make the FTSE 100 slump in 2017?

The FTSE 100 is currently trading at its highest ever level. For many investors, this will ring alarm bells. Certainly, any asset trading at a record high could continue to rise, however history tells us that what goes up must always eventually come down. And with the twin risks of Brexit and Trump set to come more sharply into focus this year, could the UK’s main index be about to slump?

The Trump effect

While share prices have risen significantly since the US election, the reality is that the new president is likely to offer heightened uncertainty in the coming months. While his economic policies could spur growth as taxes are set to fall and spending is expected to increase, there’s a lack of detail on his wider ambitions.

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Specifically, Trump’s foreign policy is a known unknown. Although it’s clear that he will seek improved relations with Russia, his attitude towards other major global economic powers such as China and the EU remains unclear. This could lead to a heightened risk of more protectionist policies and a shift away from the policy of seeking global free trade, which has been a foundation of economic growth and prosperity in recent decades.

As mentioned, Trump could improve the performance of the US economy. However, in the short run he could cause investors to adopt an increasingly risk off attitude. This could lead to falls for riskier assets such as shares during the course of the year.

The Brexit effect

Alongside the impact of a new US leader, the FTSE 100 faces the risk of an economic slowdown caused by Brexit. Of course, since the UK decided to leave the EU, share prices have risen as a weaker pound has had a positive impact on earnings for UK-listed international companies. While this trend could continue in the short run, Brexit has the potential to cause a slowdown not only in the UK, but across Europe and the global economy.

The uncertainty caused by negotiations could lead to greater risk aversion among investors, as well as reduced investment by businesses across Europe. This could cause a slowdown in share price and GDP growth. The EU is losing its second largest economy and there’s no certainty that trade will continue without tariffs being imposed over the medium term. As such, it could weigh on the FTSE 100’s performance – especially if both sides seem unlikely to reach an amicable deal as the year goes on.

Investor action

While 2017 could be an uncertain year for the UK’s main index, it also provides significant opportunity. Share prices may fall by a substantial amount at times this year and investor sentiment could turn negative. Although paper losses could be the result for investors, such moments provide the chance to buy companies with wide economic moats, sound balance sheets and proven management teams at more attractive prices. Therefore, 2017 could be the best buying opportunity for a number of years for long term investors.

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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.

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