The FTSE 100 has fallen by around 7% since reaching its all-time high in early January. Over the course of the last three months it has experienced volatility of a kind that has not been seen since the financial crisis, with wild swings in its price level indicating that investors are becoming nervous about its prospects.
Looking ahead, further volatility may be on the cards. Investors still seem uncertain as to whether to be bullish or bearish, with the end result being a lack of clear direction in the index. However, due to the growth potential on offer within the banking and pharma sectors in particular, the index could enjoy a rise to 8,000 points over the medium term.
The outlook for the banking sector seems to be relatively bright. While it has not been a popular industry among investors in the past, low valuations suggest that it could now offer wide margins of safety. They could translate into growth potential, with the health of a number of FTSE 100-listed banks having improved dramatically in recent years.
The profitability of the sector could be positively catalysed by rising interest rates. Although inflation may have fallen slightly in the last few months, there remains an appetite among policymakers to raise rates. This could provide more profitable trading conditions for the sector and may lead to greater justification for higher ratings.
Additionally, UK banks are now in the process of generating excess capital. They have largely restructured and repaired their balance sheets, and may now be able to deliver rapidly-rising dividends. As such, they may deliver high capital growth and help to push the FTSE 100 upwards over the medium term.
The pharma sector may also have a positive impact on the FTSE 100 in future. Demand for healthcare products across the globe continues to increase, with a rising world population and an ageing one too providing a possible tailwind over the coming years. This could mean that trading conditions for companies across the sector improve, and may mean they can command significantly higher valuations than at present.
The popularity of pharma stocks has declined in recent years. Investors have become less risk-averse and have focused on cyclical companies that offer less downside protection during challenging economic periods. Increased risk-taking has meant that the defensive characteristics of healthcare companies has declined to a large extent.
However, the recent bout of stock market volatility may now attract capital to large-cap pharma stocks due to their relatively low correlation with the wider economy, as well as their solid business models. As such, they could perform well in future and may provide the FTSE 100 with a major catalyst over the coming months. Alongside the upbeat outlook for banking stocks, this could help to push the index towards 8,000 points.
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