Having fallen by 16% from May 2018 to December 2018, the FTSE 100 has experienced a period of improved performance in recent weeks. It has risen by 7% since reaching its 12-month low in late December, which suggests that investor sentiment is on the up.
However, the same risks that caused its decline in 2018 remain in play. They could cause a downturn to take place over future months, which may create a buying opportunity for long-term investors.
Uncertain outlook
Economic data from China has been somewhat disappointing of late. Although the world’s second-largest economy is expected to deliver GDP growth which is significantly higher than major developed economies, its growth rate looks set to slow down. This could hurt world economic growth, as well as investor sentiment towards global indices such as the FTSE 100.
Additionally, China faces the prospect of a full-scale trade war with the US. Tariffs increased at the start of 2019 to 25% for a variety of imports, and there is scope for additional tariffs to be put in place during the course of 2019. As ever, increasingly protectionist trade policies cause inefficiencies and are unlikely to be conducive to improved global economic growth.
Alongside this, the US is expected to raise interest rates during the course of 2019. This could cause a slowdown in the growth rate of the US economy, while also making repayments more challenging for a range of emerging markets which have US dollar-denominated debt.
Of course, Brexit is another risk which could hurt sentiment towards UK-focused shares, as well as companies with significant operations in the EU. Since around 30% of the FTSE 100’s income is derived from the UK, a slowdown in the GDP growth rate could still hold back a number of the index’s constituents.
Opportunity
Although the potential for a further fall in the FTSE 100’s price level remains, so too does a long-term buying opportunity. While falling share prices may be challenging for investors in the short run, the reality is that such periods have historically been the best times to buy high-quality stocks with strong fundamentals. Since most investors are net buyers of shares, lower stock market price levels suit them because they are able to obtain a larger number of shares than they otherwise would be able to.
With the FTSE 100 having a dividend yield of over 4%, it appears to offer good value for money at the present time. Historically, its yield has rarely been higher. Therefore, right now could be a good time to buy a range of stocks. However, with there being a number of potential risks facing the world economy, it would be unsurprising for the index to occupy a lower level during the course of the year. Should it do so, it may prove to be an excellent opportunity to lock-in good value shares for the long term.
