Buying any asset just after it has fallen in value may be challenging for many investors. After all, for it to fall there is usually a clear catalyst – especially if it takes place over a short period of time.
However, buying an asset such as the FTSE 100 (INDEXFTSE: UKX) following a price fall could lead to greater returns in the long run. Certainly, it can mean more volatility and a degree of uncertainty. But the outlook for the UK’s main index continues to be positive.
Brexit potential
So far, Brexit has generally been a good thing for the UK’s main index. It may have caused uncertainty regarding the UK’s economic outlook, but since most of the stocks listed in the index rely on international earnings to a greater extent than those generated in the UK, it has provided a boost to their financial performance. It has done so through contributing to a weakening in sterling, which has created a positive translation adjustment for the large number of companies that report in sterling, but which also have major international operations.
Looking ahead, there is further scope for uncertainty regarding Brexit. The UK and EU may have made some progress in their talks. However, there is still a lot to be discussed, and nothing is final until everything is agreed. Therefore, there is the potential for further political games to be played by both Britain and Europe – especially as the end of March 2019 approaches.
Monetary policy
The outlook for the FTSE 100 may also be upbeat because of the Bank of England’s stance on monetary policy. So far, it has adopted a cautious approach to the idea of raising interest rates in response to higher inflation. Although it recently announced that the rate of monetary policy tightening may be faster than expected, it is starting from a low base and previous expectations were for a very slow rise in rates.
As such, it still seems that interest rate rises are unlikely to affect the appeal of shares. Their pace of increase will probably be gradual and the delivery of a more hawkish monetary policy shouldn’t come with major surprises. This could be beneficial to the FTSE 100’s future prospects.
Global outlook
While the index’s recent fall was partly because of the potential for higher inflation across the global economy, the reality is that the macroeconomic outlook remains hugely positive. Lower taxes and higher spending in the US could have a positive impact on the world’s largest economy, while the second-largest economy, China, continues to generate high GDP growth. The Eurozone is performing better than it has done for a number of years, while the UK is proving to be more resilient than most people predicted prior to the EU referendum.
As such, the FTSE 100 seems to be worth buying now for the long term. Its recent fall has increased volatility, but also made its valuation even more enticing.