While the FTSE 100’s performance since the turn of the year has been rather lacklustre, in the long run it has the potential to deliver stunning returns. Clearly, the EU referendum is causing some concern among investors, with Brexit being a real possibility and having the potential to cause a degree of uncertainty in the short run. However, looking beyond that, the FTSE 100 appears to be on the cusp of excellent returns.
A key reason for that is the prospects for global economic growth. The US economy continues to record upbeat economic data and while the Federal Reserve is due to increase rates on more than one occasion during the next year, it has stressed that rate rises will be somewhat slow and steady. In other words, the Federal Reserve seems unlikely to tighten monetary policy at a rate that puts the recent economic recovery in danger.
Similarly, China remains a fast-growing economy. While its rate of growth may be somewhat slower than that recorded in recent years, it’s transitioning towards a consumer-focused economy, which offers potential for rising profitability for consumer goods and financial services companies in particular. With the FTSE 100 being an index made up of international companies, the upbeat outlook for the US and China means that now could be a good time to buy it.
Interest rates
Interest rates in the UK are likely to remain relatively low. Unlike in the US, UK interest rates haven’t yet been raised and the prospect of that occurring seems slim in the near term at least. This should provide the FTSE 100 with a boost over the medium term and ensure that those FTSE 100 companies that have exposure to the UK economy continue to benefit from an improving consumer outlook.
Furthermore, dividends of UK-listed companies are likely to remain relatively appealing with the Bank of England maintaining a dovish stance, which should increase demand for FTSE 100 stocks and could push their share prices higher.
As well as an improving global economy and low interest rates in the UK being reasons to buy the FTSE 100, its valuation also has considerable appeal. For example, the FTSE 100 trades on a dividend yield of 4%. This is relatively high and has, in fact, not been higher since the credit crunch when the prospects for dividend payments were rather uncertain.
Appealing yield
While mining and oil companies may be forced to cut dividends, their reduced weighting in the index following their share price falls means that the FTSE 100’s yield should remain relatively appealing. As such, the FTSE 100 has the potential to not only record a sound income return over the coming years, but rather its valuation indicates that a higher price than its current level of around 6,250 points is well-deserved.
So, although there’s likely to be a relatively high degree of volatility in the near term, buying the FTSE 100 right now for the long run appears to be a logical move.
