The FTSE 100 index started 2020 trading above 7,500. When the coronavirus crisis began to unfold towards the end of February, the index started to slide. It continued to decline in March before reaching a multi-year low of 4,990 towards the end of the month.
Since then, the index has started to recover. The FTSE 100’s currently up by more than 25% from its 2020 low. What’s more, there could be further gains on the horizon in the near term.
FTSE 100 outlook
Clearly, the FTSE 100 index may face some significant headwinds in the near term. A second wave of coronavirus may result in another economic slump that could have a considerable impact on the blue-chip index’s constituents.
Further, at this stage in the crisis, it’s impossible to tell if the events of the past few months will have a lasting impact on the global economy. Growth could remain sluggish for several years. As more than 70% of the FTSE 100’s profits come from outside the UK, if the global economy struggles in the next few years, the index may struggle as well.
However, there are some green shoots on the horizon. Policymakers around the world have acted quickly to try and contain the impact of the coronavirus crisis on respective economies. An unprecedented amount of economic stimulus has been created. This may help cushion the financial blow of the pandemic.
It also seems as if economies across Europe are rebounding from the crisis. Retail sales and manufacturing output in crucial eurozone economies such as Germany, France and Italy have shown strong growth in the past few weeks. Although this recovery could stumble in the months ahead, these trends are highly positive.
Tech stocks outperform
Some companies in the FTSE 100 index have felt the impact of the crisis much more than others. The supermarkets, tech stocks and mining groups have all performed well, while banks and oil producers have struggled.
This trend may continue, and it could help push the index higher towards the end of the year. The FTSE 100 is a market-cap weighted index. As such, individual stocks which have a higher market capitalisation represent a correspondingly higher weight in the index. This means growth companies will have a more significant impact on its performance over time than struggling businesses.
Therefore, it’s likely tech stocks and defensive businesses like utilities will have a bigger impact on the FTSE 100’s performance for the rest of the year. As struggling companies continue to underperform, their impact on the index’s performance may continue to decline.
This trend may lead to improving returns for the index during the rest of 2020. It could even mean the FTSE 100 index returns to the level at which it began the year, even if there’s a second wave of coronavirus.
A second wave of the virus would only accentuate the trends we’ve seen in the first half. That could mean further outperformance of tech stocks, miners and retailers.
