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3 reasons why the FTSE 100 could drop 1,000+ points this year

The FTSE 100 has experienced a highly volatile 2017 thus far. While it has hit a record high, it has also experienced some extremely disappointing days. Looking ahead, there is a realistic chance of declines in the coming months, which could present a buying opportunity for long-term investors. Here are three risks facing the index which could cause it to fall by 1,000+ points during the course of 2017.

1. Global tensions

Geopolitical tensions in the Middle East and Asia could cause investor sentiment to decline in the short run. The US has stated recently that an era of strategic patience with North Korea has now come to an end. While this may or may not mean military action, the chances of it taking place now appear to be higher than they have been for some time. In the event of more tension or military action, stock markets across the globe would normally be expected to decline.

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A similar situation could take place in the Middle East. Conflict in Syria seems to be no closer to resolution than it has been at any point in recent years. Further developments in the region could cause investors to factor-in greater risks over the medium term, which could help to send the FTSE 100 more than 1,000 points lower.

2. French elections

Although the French elections have been on the horizon for a long while and investors have therefore had ample opportunity to prepare for them, a shock result could still negatively affect share prices. While the status of the EU may not be under threat from Brexit, if France decided that it was not in the country’s interests to remain part of the political or economic union, it could cause uncertainty to increase.

In fact, it could be argued that if Britain and then France were to leave the EU, it would be severely weakened. They are two of the largest economies in the world and would therefore leave a funding gap for the EU as well as create instability in the short run.

3. Brexit

Of course, the risks from Brexit remain. Although negotiations have now started and the UK economy is performing well, there are still significant ‘known unknowns’ ahead.

It is not clear whether the UK will have access to the single market, nor whether it will have full control over immigration policy. This means there remains a realistic chance that a deal will not be struck between the UK and EU by the end of the two-year negotiating period, which could lead to a gradual decline in the FTSE 100’s price level.

Therefore, the outlook for the index appears to be somewhat downbeat. However, for long-term investors it could present a buying opportunity. Volatility may be high in the short run and paper losses may be relatively likely. But history shows that the best times to buy shares can be when risks are at their highest, and valuations are at their lowest.

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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. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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