As we start the new year, global stock markets are at record highs. The FTSE 100 is no exception, although it has lagged behind other major markets this year, it ended 2017 at a high of 7,687.77.
So, what is the likelihood of the FTSE 100 breaching the 8,000 mark in the new year? We ask investment experts to predict what 2018 might have in store for the FTSE 100.
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Alan McIntosh, chief investment strategist at Quilter Cheviot, says: "To a major extent, global stock markets are interlinked, so the fate of markets outside the UK will have a meaningful influence on the direction of UK-listed shares. Despite the difficult political environment this year (Trump, Brexit, European elections), stock markets have been strong because of the improving fortunes of the global economy."
For the first time since the financial crisis of 2008, all major economies in the world are growing at the same time. "Looking to 2018, the outlook for the global economy and corporate earnings remains positive, so it is reasonable to anticipate that markets should continue to prosper," he adds.
However, Brexit negotiations could have a major impact on the UK. He says: "The fall in the currency after the EU referendum boosted the share prices of the many international companies listed on the FTSE 100 during the latter half of 2016. In 2017 the pound continued to weaken against a resurgent euro, but strengthened against the US dollar. This latter move has dampened the share prices of the big dollar earners that are listed in London over the course of this year."
If the market thinks that the Brexit talks are progressing well, Mr McIntosh argues, then the pound could rise further, which could limit the rise of the FTSE 100 because of the dominance in the index of overseas earners. In this situation, even if global markets continue to rally, the UK market might underperform its peers and struggle to get to 8,000.
He adds: "By contrast, a poor negotiation with our EU colleagues could put the pound under downward pressure again, which would boost the share prices of many of the leading companies as it did in 2016. It is ironic, therefore, that a bad Brexit could actually be good for the FTSE 100."
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Jordan Hiscott, chief trader at Ayondo Markets, believes the FTSE will go above 8,000 in 2018. He argues the Brexit turmoil "will increase dramatically as negotiations with Europe continue down an incredibly fractious route". He therefore expects sterling to weaken, which should propel the FTSE higher.
David Jane, manager of Miton's multi-asset fund range, agrees with Mr Hiscott’s sentiment. He says: "I see absolutely no reason why the FTSE 100 might not rise above 8,000 during 2018; this is only a few per cent higher than current levels.
"Global economic growth is strong, so company earnings growth should also be healthy for the mix of companies that comprise the FTSE 100 (mainly international businesses). Add in a little weakness of sterling and some inflation, and we could see the FTSE 100 trade considerably higher than 8,000."
In essence, the new year looks promising for the rise of the blue chip index, but the cost could be that Brexit negotiations don’t go well and sterling suffers.
Matt Strachan, chief investment officer at Thorntons Investment Management, takes a wider perspective on the factors helping to underpin the blue chip index.
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"The index has struggled to get past 7550 for much of this year, but the passing of a new US tax bill (benefiting a number of companies in the FTSE 100) has provided a catalyst to allow that to happen at the end of the year," he observes.
However, Peter Elston, chief investment officer at Seneca, argues that while it is very likely that the FTSE 100 will hit 8,000 next year it is unlikely to soar beyond it.
He says: "8,000 is around 6% away from where we are at the moment, which would be a fairly decent return in any one year. Expecting more would only be reasonable if we were in early economic cycle, as this is when returns tend to be well above average.
"As it is, we’re now moving from recovery to expansion phase, as indicated by the Bank of England having finally raised interest rates. Business cycle analysis suggests that returns now should therefore be slightly below average, so 6% is doable but not much more. No soaring. Sorry."
This article first appeared on our sister website Money Observer.
Read more about markets and the economy on Moneywise.
This article was originally published in our sister magazine Moneywise, which ceased publication in August 2020.
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