Rewind to the end of August and the future for the FTSE 100 looked dire. In fact, the index fell from 6696 points at the start of August to a low of 5898 by the 24th of August. That was a drop of 12% in a matter of weeks and, for many investors, it was time to sell up or at least avoid buying shares as Chinese growth concerns weighed on market sentiment.
In the last three months, though, the FTSE 100 has posted a rise of 5.7%. On an annualised basis that works out as a rise of 25%, which is clearly a superb comeback in a very short space of time. Looking ahead, there remain a number of potential catalysts which could allow the FTSE 100 to continue that rate of growth. Likewise, there are a number of risks which could force it to stall or even return to a sub-6000 point level.
For example, US interest rate rises are now imminent. In fact, if they do not rise by the end of the year then it would be a major surprise to investors across the globe. That’s because the Federal Reserve has guided the markets to expect a rise in Q4 2015, with the collapse in share prices in August seemingly delaying their decision. Now, though, with the US economy moving from strength to strength and having responded positively to the ending of the Fed’s monthly asset repurchase programme, monetary policy tightening is set to shortly begin.
This could have a negative impact on share prices, since it may course a degree of uncertainty and concern. Nobody knows how the US economy will react to a rising interest rate, or whether it will choke off the strong recovery which has taken place. And, even if it makes little difference, markets usually do not like change and so the FTSE 100’s strong recent run could moderate somewhat in the coming weeks and months.
In addition, weakness in the Asian economy could be the story of 2016. Chinese growth rates are on a downward trajectory and Japan is in recession, both of which could harm the profitability of Asia-focused companies and also knock global GDP growth rates downwards. As such, investor sentiment may falter which, alongside a very weak resources sector, could hurt the FTSE 100’s progress.
Of course, there are potential catalysts to allow the FTSE 100 to continue its superb run, too. For example, it remains very attractively priced, with the financial services sector in particular being relatively undervalued. Evidence of its appealing price level can be seen via a dividend yield of 3.8%, which indicates that capital growth is on the horizon.
Furthermore, with the UK economy performing relatively well and the Eurozone having the right monetary policy through which to combat anaemic growth (namely quantitative easing), the outlook for Europe is much brighter than it has been in recent years. This could act as a counterweight to potential weakness in Asia, thereby providing the FTSE 100 with sufficient fuel to drive its price level higher.
Clearly, this is a highly uncertain period for the FTSE 100 and, while its performance of the last three months is exceptional and may not be repeated moving forward, the index remains a sound place to invest for the long term.