On 1 December 2015 I wrote an article where I set out three financial predictions for 2016. They were for the FTSE 100 to close the year above 7,000 points, for interest rates to be no higher than 1% by the end of the year and for UK house prices to be lower on 31 December 2016 than they were a year previously.
FTSE on the rise?
Clearly, the outlook for the global economy has changed somewhat since that article was published and investors are now much more fearful than they were even a couple of months ago. As such, it may appear as though the chances of the FTSE 100 closing above 7,000 points have dwindled somewhat. However, that may not necessarily be the case.
That’s because the chances of a US interest rate rise are now relatively slim over the medium term. Even if the US economy continues to add jobs and grow at an impressive pace, the Federal Reserve is likely to be much more cautious now regarding a tightening of monetary policy than a few months ago. This means the Fed is likely to be less willing to raise interest rates, which could have a positive impact on GDP growth rates and stock markets across the world, including the FTSE 100.
In addition, stock markets appear to have overreacted somewhat to a slowing China. The country is in a transitional period and this has been well-documented in recent years, with the share price falls witnessed in recent weeks not appearing to fully factor-in the huge potential that China offers. With a new middle class gradually emerging, consumption in China is set to rise and this could propel the earnings of a whole host of FTSE 100 stocks upwards. As this is factored-in and investor fear surrounding China and the US fades as we move through 2016, the FTSE 100 could easily still surpass and close well above 7,000 points.
UK interest rates
Meanwhile, UK interest rates now seem set to stay at 1% or lower throughout 2016. Having seen the reaction of investors to the US interest rate rise, the Monetary Policy Committee is unlikely to raise rates until there’s certainty that the risks of doing so are kept to a minimum. Furthermore, with inflation remaining close to zero, it would be difficult to justify anything more than a token interest rate rise, or else the threat of deflation could become a real problem over the medium term.
The house price issue
Of course, a low interest rate is good for UK house prices. As such, the prediction for UK house prices to fall this year may seem like a rather short-sighted and even contradictory viewpoint. After all, house prices are seemingly a one-way ticket to riches for individuals and families across the UK, with low interest rates and constrained supply being positive catalysts on the housing market.
However, with the referendum on a potential Brexit likely to dominate the next four months, inward investment into Britain’s property market may fall sharply. That’s because the country has been seen as a safe haven in the past. And while the polls suggest that the ‘remain’ side is currently in the lead, the General Election polls were wholly inaccurate last year.
And even if Britain does remain in the EU post-June, it may not be seen as such a stable, robust and safe option anymore. This, plus a lack of affordability and the potential for a small rise in interest rates, mean that investors seeking to record capital gains and high yields may be better off sticking to shares.