We’ve still got six weeks to go before the end of the year. Why, you may ask, am I already talking about my forecasts for 2020? Well, six weeks is a pretty short space of time, especially when we have the holiday season kicking off in about a month.
Planning and getting ideas now for next year puts you in a much better position to act accordingly over the next few weeks before everything slows down for Christmas. Add into that a December general election, and you can see why I think it is appropriate to publish this article now.
My forecast for 2020
Right, let’s get straight down to business. My headline figure for the FTSE 100 index 12 months from now is 8,100. This represents just under an 11% gain from current levels of circa 7,300. This is purely my opinion and should not be taken as fact, however it is based on my analysis of a number of factors.
Firstly, the UK is forecast to grow its GDP by 1.5% in 2020, with inflation expected to move higher from the current 1.5% back above 2% (the Bank of England’s target rate). The elephant in the room with these figures is both the December general election, and the Brexit deadline of January 31. I think there will be no change at 10 Downing Street following the election, and thus expect the Brexit bill to be passed in time to meet the deadline.
Therefore, I feel the expected growth rates in the UK are realistic and they could even be higher if we get a ‘Brexit bounce’ in markets and consumer sentiment. This will aid domestic businesses in particular.
Global growth is also forecast to rise by 3.5% next year, according to the International Monetary Fund. This is important because most of the larger constituents of the FTSE 100 are international players. Think of firms like British American Tobacco, Royal Dutch Shell, HSBC etc. Global growth is going to be a systemic factor that could really aid higher share prices from these businesses.
How did I get to the figure of 8,100? Well, look at the performances year-to-date of the major global stock markets. In the US, the Dow Jones and S&P are up between 10% and 14%. In Europe, the German DAX index is up 16%. In Asia, the Nikkei 225 is up around 8%.
The FTSE 100 has lagged these gains, offering around a 4.5% return thus far, hampered by Brexit uncertainty and a volatile British pound. Thus, if we do eliminate the Brexit concerns and return to a stable environment, it is logical to think we could achieve similar returns to that seen around the world today (especially due to the growth forecasts).
I have reduced my forecast slightly due to the potential for the British pound to appreciate, see my note on the correlation here.
What this means for your ISA allocation
With my forecasts of a strong double-digit return, I would look to allocate my funds towards the FTSE 100 accordingly. Tracker funds would be a good idea, as any individual stocks could see you risk under-performing the index return.
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Jonathan Smith owns no share mentioned. The Motley Fool UK has recommended HSBC Holdings. 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.