The performance of the FTSE 100 since May has been hugely disappointing. It has declined from a record high of 7,877 points to trade at around 7,070 points. That’s a fall of just over 10%, and suggests there’s been a sharp change in investor sentiment.
Of course, a key reason for this is uncertainty surrounding the prospects for the world economy. Investors now seem to be concerned that the GDP growth of recent years isn’t set to continue, with risks such as a global trade war and an overheating US economy being present.
Given that the best time to buy shares is when they’re priced at lower levels, though, could the FTSE 100’s fall represent a buying opportunity?
Uncertain future
In the coming months, FTSE 100 company share prices could continue to be volatile. The IMF recently released a report which stated that there are risks to global economic growth, with tariffs expected to hurt progress in the coming years. Already, a number of tariffs have been announced by the US, China and various other countries across the world. Given the tit-for-tat nature of tariffs, an increasingly protectionist world could be ahead, and this may have a negative effect on the growth potential of a wide range of companies.
Alongside this risk is the potential of an overheating US economy. Aggressive fiscal policies that have included tax cuts are having a positive impact on US growth at the present time. However, there’s a risk that this could lead to a higher rate of inflation, which could prompt a faster rise in interest rates. This, it’s feared, could check the growth rate of emerging markets – many of which have borrowed heavily to stimulate growth.
Long-term potential
While uncertainty among investors may be high at the present time, it could present a long-term buying opportunity. Certainly, there’s scope for the FTSE 100 to fall further. Additional tariffs could be announced by the US, or by any other country in the world. This would be likely to hurt economic growth, and could even tip the world economy into a recession, depending on the severity of the tariffs being implemented.
However, the reality is that the outlook for the world economy remains relatively positive. There are always risks facing investors, and there’s always the potential for significant falls in the valuation of any asset. With the FTSE 100 having a dividend yield of over 4% following its recent fall, it seems to offer good value for money. The major economies of the world are forecast to deliver high growth relative to recent years, and this could lead to rising corporate profits in a variety of industries.
Therefore, while an investor buying shares today may experience paper losses in the near term, in the long run they have the potential to generate high total returns.
