The fall in the FTSE 100 in recent weeks means it’s now trading at its lowest level since July 2016. Back then, investors were concerned about the impact of Brexit on the UK economy. Today, coronavirus’ impact on global supply chains and demand in major economies such as China is their main fear.
In the short run, investor sentiment may continue to be highly cautious. However, in the long run, a successful recovery in the FTSE 100’s price level seems likely. As such, now could be the right time to buy a diverse range of FTSE 100 shares and hold them for the long run.
Short-term risks
The ultimate impact of coronavirus on the world economy is a known unknown. So far, it has caused a number of factories in China to close, while consumer demand for a range of products has fallen as a result of lower footfall to retail outlets.
This trend could continue in the short run, and may even increase depending on the severity of coronavirus’ outbreak in countries such as the US and across Europe. As such, it would be unsurprising for the FTSE 100 to experience a high level of volatility in the coming weeks and months – especially since investor sentiment is already weak. Investors could respond very unfavourably to news that coronavirus is spreading more rapidly, for example.
Long-term prospects
Despite the short-term impact on the world economy from coronavirus, the likelihood is that the FTSE 100 will recover in the long run. A similar pullback, although perhaps not on the same scale, occurred during the SARS outbreak in 2003. However, at that time, investor sentiment was already relatively downbeat due to the fallout from the bursting of the tech bubble.
Despite those difficulties, the FTSE 100 recovered to double by the time the financial crisis hit in 2007. Even though that was one of, if not the, worst recession in living memory, the index successfully posted new record highs in the following years.
As such, the pattern of the FTSE 100 shows that short, sharp corrections and bear markets are fairly commonplace and can occur for a variety of reasons. In addition, they have always been followed by successful recoveries.
Buying opportunity
Buying FTSE 100 shares today could be a risky move in the short run due to the potential for a further decline in the index’s price level. However, over the long run, it could prove to be a sound move. It may enable you to capitalise on low valuations across a variety of sectors which increase your potential rewards in the coming years.
Therefore, investors who are able to look beyond near-term uncertainty and buy into the recovery prospects of the index may be handsomely rewarded in the long term.