Last year, the FTSE 100 put in one of its best performances since the financial crisis. However, despite this performance, there are still pockets of value in the index, and it seems as if there could be further gains ahead for investors during 2020.
In fact, it appears as if there’s a genuine chance that the index could hit a new all-time high of 8,500 points over the next 12 months.
The FTSE 100 is set to benefit from several significant tailwinds in 2020. First of all, by the end of the year, the government should have made some progress on the Brexit trade negotiations. The outcome might not be perfect for businesses through the UK, but it will bring some much-needed clarity to the business community.
A trade deal between China and the US could also boost the index this year. The FTSE 100 is one of the world’s most international stock indexes. Around 70% of its profits come from outside the UK, which means that if the global economy is growing, the FTSE 100 should also do well.
Over the past two years, the US-China trade war has held back global economic growth, impacting the earnings of cyclical FTSE 100 companies. With the prospect of a deal on the horizon, 2020 could be the year these two superpowers finally settle their differences and the global economy would almost certainly benefit as a result.
Trade deals are unlikely to be the only catalysts for the index in 2020. Improvements in technology could also prove to be a big factor.
Companies throughout the index are investing tens of billions of pounds in technology to improve their operations. This investment is helping improve company efficiency and profit margins. As a result, profits are growing and cash returns to investors are also heading higher.
Banks and mining companies are great examples. Both of these sectors are investing heavily in automation, which is allowing them to reduce costs, generate more cash and grow shareholder returns.
The third and final reason why I believe the FTSE 100 could hit a new all-time high in 2020 is falling interest rates.
Central banks around the world are contemplating further interest rates cuts over the next few months to help stimulate the global economy. This could encourage companies to borrow more to invest, and it could drive up equity valuations.
The bottom line
When you add all three of the above factors together, it is easy to see how the FTSE 100 can hit 8,500 in 2020. This level is only 10% above where the FTSE 100 is trading today.
It is not unrealistic to think that earnings per share could grow by 10% over the next 12 months, which would justify a 10% increase in the index. A combination of higher profit margins, higher prices, and lower costs could justify this increase.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.