Since reaching a low of 5,640 points on 20 January, the FTSE 100 has recorded a stunning comeback. In fact, it has risen by 363 points (or 6.4%) so that it now stands at 6,003 points. That’s exactly 1,000 points from its all-time high and if it continues to rise at the same rate of 46 points per day on average (as it has done since 20 January), it will reach that all-time high in less than 22 days.
Clearly, it’s unlikely that the FTSE 100 will rise on a smooth trajectory over the next few weeks. That’s simply not how stock prices operate and just as the index has made a miraculous turnaround from its recent lows, it could just as easily reverse all of the ground it has made up in a matter of days. In other words, volatility is likely to be very high moving forward.
The China effect
But reaching 7,003 points wouldn’t be a particularly difficult task this year. That’s because the outlook for the global economy remains very upbeat in the long run. Certainly, the rise in US interest rates and China’s soft landing are causing investors across the globe to become somewhat uncertain and nervous about the prospect for deflation and a recession. However, both the US and China have huge long-term growth potential.
For example, China is due to become an increasingly consumer-focused economy, which has the potential to reinvigorate demand for consumer goods and services. Admittedly investors are understandably worried about future global growth as it was China that pulled the world out of a recession a few years ago. Yet even though its growth rate is likely to slow, it should still be much higher than that of the developed world.
Similarly, the US economy also has excellent growth potential. While the shale oil and gas industry is encountering severe challenges due to a low oil price, an increase in interest rates signifies that the world’s largest economy is beginning to return to full health. Therefore, while Europe may continue to struggle even with the adoption of quantitative easing, the positive impact of the US and Chinese economies on investor sentiment could be enough to push the FTSE 100 above 7,000 points.
In addition, the FTSE 100 is relatively cheap at the present time. It yields over 4% and historically that’s a high level. If the FTSE 100 trades at 7,000 points it would equate to a yield of 3.4%, which is entirely reasonable and in line with the index’s long-term average.
FTSE evolution
Furthermore, as the domination of the FTSE 100 by the resources sector has faded in recent months as their share prices have fallen, their continued declines will have a smaller effect on the index than they would have done a year ago. As such, the performance of financial services companies, as well as consumer stocks, will have a greater impact on the FTSE 100 in future and could positively catalyse the index to enable it to reach 7,003 points. Although that may take longer than 22 days, such a level is very achievable this year.