With the FTSE 100 having risen to over 7,500 points in recent months, it is trading less than 300 points below its all-time high. As a result, many investors may feel that now is not the right time to invest in the index, with it unlikely to offer many stocks that have wide margins of safety.
However, the reality is that the FTSE 100 could generate strong returns over the long run. It appears to offer good value for money at the present time, with a number of potential catalysts being present to push its price level even higher. As such, it could be worth investing in the index now, with the aim of being less reliant on the State Pension in retirement.
Brexit
Clearly, Brexit is a dominant topic across the UK and economic spectrum at the present time. There is still great uncertainty as to exactly what will happen in terms of a deal, as well as how any deal will ultimately impact on the performance of the economy.
This uncertainty may not be such a bad thing for the FTSE 100. Its constituents generate the vast majority of their earnings from outside of the UK, so they are more closely correlated to the performance of the global economy, rather than the UK economy.
As such, if uncertainty surrounding Brexit builds over the coming months (and even years), the pound could weaken and this may lead to a positive currency adjustment for a number of the index’s constituents. The end result could be higher valuations and a higher index price level.
Global growth
While the UK’s economic growth remains uncertain, it has generally been much stronger than many people expected after the EU referendum in 2016. One of the main reasons for this, though, has been the strength of the global economy, which has been pulling the UK economy along to a degree.
Notably, the US economy is performing well, with China continuing to grow at a fast pace. Over the next couple of years, both countries are expected to maintain their current growth rates, and this could mean that corporate earnings are set to enjoy a ‘purple patch’ which could translate into higher valuations and improving investor sentiment.
Investing in the FTSE 100 provides investors with exposure to the world economy. At a time when austerity is coming to an end and spending is on the up, the index could make record highs which are significantly greater than those of the past.
Valuation
Despite the bright outlook for the world economy, the FTSE 100 continues to offer good value for money. Its dividend yield is historically high and stands at just below 4%. This suggests that even though we are in the midst of a bull market, there could be much further for the index to go over the medium term.