The performance of the FTSE 100 in 2019 has been highly encouraging. After a tough second half of 2018, the index has been able to generate improved performance that has seen it record a gain of over 6% in little more than two months. If it continues at its current pace, it could reach a record high within a matter of months.
Clearly though, the index faces a number of risks, such as an uncertain global growth outlook and Brexit. Could they derail its upward trajectory? Or does it continue to offer growth potential?
Risks
Brexit could have an impact on the performance of the FTSE 100 in the short run. With around 25% of its income being generated from within the UK, the performance of the economy matters to the index. Uncertainty surrounding Brexit could therefore have a negative impact on the index’s performance, should investors decide to demand a wider margin of safety.
However, even if Brexit causes challenges for the UK economy, the detrimental impact of this on the FTSE 100 could be offset to some degree by a weaker pound. With the majority of FTSE 100 companies’ earnings derived from international markets, they may benefit from positive currency adjustments in the coming months.
Of course, there are various other risks facing the FTSE 100. The global economy is still becoming increasingly protectionist, with China and the US maintaining their tariffs at present. Continued upward momentum is still with us regarding US interest rates, which may lead to a slowing in the global growth rate. This could check the FTSE 100’s growth prospects, and may mean greater uncertainty for investors.
Returns
The FTSE 100 though continues to offer good value for money. It has a dividend yield of around 4.4%, which is historically high and suggests there’s a wide margin of safety on offer. Indeed, the index hasn’t had a yield at such a high level on many occasions in the last couple of decades. When it has, the economic outlook for the world economy has generally been weaker and more uncertain than it is today. This could suggest there is a buying opportunity on offer.
As such, adding high-quality shares trading on low valuations could prove to be a sound strategy at the present time. Finding shares with high yields, low price-to-earnings (P/E) ratios, and positive net profit growth forecasts isn’t especially challenging right now. This could suggest that it’s a ‘buyers’ market’, which may offer improving returns in the long run.
Certainly, the index’s strong start to 2019 is unlikely to continue unabated. The risks facing the global economy plus Brexit may mean investor sentiment ebbs and flows in the short run – even if the actual performance of the world economy remains strong. As a result, now could be a worthwhile time to buy shares in FTSE 100 companies for long-term investors.
