Why I Think The FTSE 100 Will Hit 7,000 Again In 2016

2015 is dead – long live 2016!

2015 ended with a whimper for the FTSE 100 after a year that was effectively a game of two halves.

The first half saw the market and confidence soar to top the psychologically important 7,000 points mark, this despite the oil price well off its highs, other commodity prices weakening owing to general weakness in the global economy and the slowdown in China ever present in the news.

Then in the second half, with the market off its new highs, reality kicked in and the FTSE crashed below 6,000 points. It has remained volatile ever since.

A brief glace at the chart below just goes to show that market sentiment can turn on a penny, catching even the most experienced investors off-guard.

A question of balance

Despite the lurch down towards 6,000 points, it may surprise you that only 39 companies’ share prices were in negative territory over the last 12 months according to data from Digital Look.

Unfortunately for those with investments that tracked the FTSE 100, the negative return was caused by poorly-performing miners, oil and gas companies, and big banks – all of whom were in negative territory.

And owing to their size, it was these very companies that pulled the index lower over the past 12 months, outstripping the mainly positive performance from the other 61 constituents.

Is a return to form on the cards?

So what is it precisely that leads me to believe that 2016 will see the FTSE 100 regain its composure and hit 7,000 again?

I don’t have a crystal ball, but I believe that there are likely to be a number of events that could see these overweight sectors outperform in 2016.

Firstly, I believe that 2016 will see at least one, but more likely two, interest rate hikes to 1%. Now, whether this is in the first or second half of the year is anyone’s guess. But whatever the timing, it will assist domestically-focused banks such as Lloyds Banking Group, Barclays, and RBS, plus HSBC to a lesser degree. In addition, given that Lloyds is one of the most popular investments for private investors, I think the upcoming share sale could well reinvigorate investor interest in the banking sector.

Secondly, I believe that the oil price will begin to stabilise at some point this year once demand starts to hold sway over supply. I think that it will rise back towards $60 per barrel, which bodes well for the likes of BP and Royal Dutch Shell. In time, the approaching finalisation of the acquisition of BG Group will prove to be a profitable move, in my view.

And finally we turn to the elephant in the room – the miners, most of whom are in the top 10 biggest losers for 2015. The shares have been battered on a heady mix of falling commodity prices and too much debt.

However, I think 2016 should bring some stabilisation in the prices of commodities, operators cutting production and costs, not to mention (as we have already seen in some circumstances) a few dividend cuts. In time, investors will see stronger balance sheets and a rebased, more sensible dividend going forward.