The FTSE 100 has declined by 15% since reaching an all-time high in May. That’s a hugely disappointing performance in a relatively short space of time. Reasons for the fall in the UK’s large-cap index include the prospect of a full-scale global trade war, a rising US interest rate and Brexit.
Looking ahead to next year, those risks could remain present. In fact, there is a chance that the index will move lower, with investor sentiment expected to remain weak. However, from a long-term investment perspective, the FTSE 100 could offer significant appeal today.
Risks
As mentioned, the FTSE 100 faces a number of risks which could intensify during the course of 2019. Chief among them is a rising US interest rate. It is expected to increase at a relatively fast pace next year, with it having the potential to end the year above 3%. Having fallen sharply following the recent rise in the US interest rate, there could be a continued decline in the share prices of a number of companies over the coming months should a tighter monetary policy be put in place.
Additionally, President Trump may decide to place further tariffs on Chinese imports. Any further tariffs could be met with reciprocal tariffs by China, and the end result may be a continued move towards an increasingly protectionist global economy. Investors are likely to react badly to any further tariffs, since they can create inefficiency and uncertainty.
Alongside these risks, Brexit may yet cause challenges for the UK, European and world economies. In an era of increasing interdependence, a struggling UK economy could hurt the prospects for a number of countries at a time when there are already fears surrounding the outlook for the world economy.
Returns
Despite the risks facing the FTSE 100, it could offer investment appeal at the present time. The index has a dividend yield of around 4.5%, which is historically high. This suggests that it offers good value for money from a long-term investment perspective.
Furthermore, it is almost impossible to buy any asset when it is at its lowest price level, and then sell at its highest price level. Waiting for an even lower FTSE 100 price may prove to be a sound move, with the aforementioned risks having the potential to push the index lower. However, the index could deliver a stunning recovery in 2019 which catches investors by surprise.
Although buying any asset when it is at a low ebb may seem risky, the reality is that the risk/reward ratio for the FTSE 100 has recently moved further in an investor’s favour in my opinion. Potential risks may now be factored in, with history showing that the index always delivers a comeback from even the most severe financial crises. As such, and while there may be better opportunities to buy in the near term, for long-term investors the FTSE 100 seems to offer value investing potential.
