The FTSE 100 could hit 8,000 before the end of 2018, according to Richard Stone, chief executive of The Share Centre, who said the forces that have driven the bull run show no sign of abating any time soon.
However, Stone warned the path upwards may not be a smooth one and that investors who are taking for granted the low-volatility environment that has characterised markets in recent years could be in for a nasty surprise.
Annual performance of FTSE 100 since 2012
| Name | 2017 (%) | 2016 (%) | 2015 (%) | 2014 (%) | 2013 (%) | 2012 (%) |
|---|---|---|---|---|---|---|
| FTSE 100 | 11.95 | 19.07 | -1.32 | 0.74 | 18.66 | 9.97 |
Source: FE Analytics
The FTSE 100 closed 2016 at an end-of-year high and did the same again in 2017. It has now seen just one negative year from a total return point of view in the past six – and that was only a marginal loss of 1.32 per cent, in 2015. Many commentators are sceptical about how long this upward trajectory can last, speculating about when the correction will hit, what the trigger will be, and how far markets could fall.
However, Stone (pictured) pointed out markets are driven by supply and demand and believes the forces of demand currently “winning the day” – including improved global growth, accommodative monetary policy and increased corporate merger activity – will continue to support the bull run.
“There are other factors in the UK specifically which will also help drive demand for equities,” he added.
“Most notably this includes the more than doubling (from 2 per cent to 5 per cent) of the minimum contribution required to be made into auto-enrolment pension schemes. This takes effect in April 2018.
“Many FTSE 100 constituents are in the mining, oil and gas sectors, which will benefit from increasing commodity prices driven by increased global growth. The banking sector continues to repair itself from the ravages of the financial crisis and will do so further as interest rates rise, enabling some margin expansion.”
“I believe this could drive the FTSE 100 above 8,000 for the first time in the index’s history.”
However, Stone said it won’t be all plain sailing in 2018 and that investors should not count on another year-end record high for the FTSE.
“The VIX Index – a measure of market volatility primarily looking at the US market – is close to record lows not seen since early 2007,” he continued.
“This is in contrast to the fact that the world feels a more uncertain place – to me at least – than it has done previously. This manifests itself in concerns over many geopolitical issues such as North Korea, Brexit and the impact of a resurgent Russia.”
Stone also warned UK investors that inflation could remain “stubbornly high” this year, fuelled by the low level of unemployment, a slowdown in migration and the continuing impact of quantitative easing and low interest rates.
“This will be felt in demands for higher wages, fuelled in part by the government’s decision to relax the public sector pay-cap – a move which is recognition that the squeeze on wages cannot continue indefinitely in the face of higher inflation,” he continued.
“If inflation remains stubbornly high, the demands for higher wages may not be sufficient to drive a return to real wage growth. Personal investors will continue to see their incomes, standard of living and ability to add to any savings and investments, further squeezed.”
He added that any newsflow suggesting difficulties in the Brexit negotiations – of which he thinks there will be plenty, based on the experience to date – could drive sterling lower, in turn adding to inflation.
“Brexit is likely to be a rollercoaster ride as the difficult issues come into sharp focus,” he added. “Reaching an agreed position on a handful of issues ahead of ‘Phase 2’ was hard and this will be harder.
“However, there does seem to be an element of ‘kicking the can down the road’ as there is agreement on a transition period to at least 31 December 2020 and the trade deal we do with the EU will not be agreed until we are in that transition period. The next phase of discussions will be keenly focused on what that transition period looks like.”
Despite Brexit-related headwinds, Stone remains optimistic about the prospects for the domestic economy. For example, he said that while the devaluation of sterling has increased inflation and hit real wage growth, it is boosting exporters and with global growth now improving, the UK should benefit.
As a result, he thinks the UK will outperform the current consensus growth forecasts for 2018 of around 1.4 per cent.
In terms of exactly how investors should position themselves, he said it is important to take a long-term view.
“Investing a little and often helps overcome some of the challenges higher volatility presents as well as enabling investing when there is less disposable income to put to one side in lump sums,” he continued.
“Normally, defensive sectors such as utilities can provide some relief in more volatile times, and may help investors looking for income, although now investors should be wary of the political threat of renationalisation should the UK government change.”
He added that if interest rates rise further in 2018 and beyond what is currently expected, investors should look for companies that hold significant sums of cash rather than those financed through debt.
Overall Stone said 2018 promises to be an exciting year and a potential rollercoaster for personal investors. He added that while it may be a bumpier ride than in 2017, there should be plenty of opportunities and ultimately the markets should continue to reflect the benefits of increasing global growth and continued accommodative monetary and fiscal policy.
“The challenge will be to maintain a long-term view, identify investment opportunities where broad market sentiment fails to discriminate between sectors or companies and hold tight during any near-term increase in volatility as political risk in the UK and overseas remains high,” he finished.