The performance of the FTSE 100 in 2018 has been somewhat disappointing. Although at times it has generated impressive growth, overall it’s down by 4% since the start of the year.
During 2018 though, it has come close to reaching the psychological 8,000 points level. In May, it reached 7,877 points but has since fallen to its current level of around 7,370 points.
Looking ahead, the FTSE 100 could deliver a return to strong growth. It could even reach 8,000 points by Christmas, due to the prospects for Brexit and the world economy.
Brexit risks
At the time of writing, a Brexit deal has still not been signed. The chances of a deal being agreed before the March 2019 deadline seem to be declining, with a ‘no-deal’ Brexit perhaps now more likely than an agreement being signed between the UK and the EU.
Of course, it’s incredibly difficult to know exactly how talks are progressing. The reality, though, is that the longer a ‘no-deal’ Brexit seems possible, the bigger the potential impact on the prospects for the UK economy. Uncertainty about the near-term growth rate of the UK could lead to weakness in the pound, which may have a positive impact on the FTSE 100.
With around three-quarters of earnings in the FTSE 100 being derived from abroad, and a large number of incumbents reporting in sterling, a weaker pound would be good news for the index. It could cause a boost in profitability and valuations, which helps to propel the index towards 8,000 points. If a Brexit deal does not materialise in the next few months, then the index could be trading significantly higher by Christmas.
Global growth
At the same time as the outlook for the UK economy remains uncertain, the prospects for the global economy appear to be relatively bright. The US economy posted 4.2% annualised GDP growth in the second quarter, with it expected to be around 3.5% in the third quarter. With China’s ‘soft landing’ proving to be more orderly than many investors had feared, the major economies in the world appear to be performing well.
With the FTSE 100’s international focus, this could lead to improving performance for the index’s incumbents. Its 4% dividend yield suggests that it may be undervalued at the present time. This could attract investors seeking to buy stocks with wide margins of safety at a time when a number of other major indices appear to offer less appealing valuations.
Long-term potential
Clearly, reaching 8,000 points in the coming months would still not fulfil the long-term growth potential of the FTSE 100. The index continues to have a number of shares that offer low valuations, bright growth prospects, and sound strategies. As such, investors looking to beat the index may have a number of sound opportunities. And with the potential tailwind of a rising index, total returns could be high for FTSE 100 investors over the coming years.
