Will the FTSE 100 hit 8,000 in 2020?

The fortunes of the FTSE 100 depend on the health of the global economy and progress on Brexit.

The FTSE 100 currently sits at just over 7,600 points. While it has been a rocky year for the index, in price terms it has managed to gain just over 13%, year-to-date. How will the index do in 2020?

As with all forecasting, predicting where the FTSE 100 will go is no easy task. The FTSE 100 reflects not only sentiment towards the UK but also that of the global economy, given the large amount of companies on the index that derive their earnings from abroad.

As a result, there are several key issues likely to determine where the FTSE 100 goes in 2020. First, the US/China trade deal. The first phase of the trade deal was recently agreed by the two economic superpowers, leading to global rally in stocks in December. 

Should both sides stick to trying to resolve the almost two-year long dispute, the FTSE 100 should continue to rise. However, as the last year has shown, both sides are prone to unexpectedly withdrawing from an agreement at the last minute. 

At the same time, if the deal between the US and China stays on course, the prospects of the global economy should also start to pick up which should also help the FTSE 100 index.

However, for global economy to pick up, many have argued that governments will also need to increase fiscal spending, particularly in Germany and the European Union. While Christine Lagarde, the new head of the European Central Bank, has voiced support for increased government spending, the decision lays with region’s national governments.

Finally, the prospects of the FTSE 100 are also riding, in part, on the UK government managing to negotiate a trade deal with the European Union. While markets treated the news of the Conservative election win positively, sentiment turned somewhat once prime minister Boris Johnson announced the UK will leave the European Union at the end of January regardless of whether or not a deal is struck.

However, if it does look as if a deal with the European Union will be reached, UK stocks could come back into favour.

The Bank of America Merrill Lynch Global Fund Manager survey has consistently shown that fund managers have consistently been underweight the UK since the 2016 referendum. At the same time, there has been billions of pounds withdrawn from UK funds, according to data form the Investment Association. If it starts to look like there will be an orderly conclusion to Brexit, UK assets could come back into favour, with the FTSE 100 seeing a lift.

However, there is a countervailing tendency. With the majority of FTSE 100 earnings coming from abroad, the resulting boost to sterling to any progress on Brexit could result in depressed earnings and therefore a reduction in the share price of some FTSE 100 companies.

But should the stars align and each of those scenarios play out as hoped, “then the world could look very different”, says Russ Mould, investment director at AJ Bell. Combined with the fact that the FTSE is undervalued on the basis of both earnings and yield, Mould says “the FTSE 100 may have a better chance of making it to 8,000 by the end of 2020 than many suspect.”

Mould notes: “Unloved often means undervalued and the UK is not expensive relative to its international peers or its own history on an earnings basis, with the FTSE 100 trading on around 12.5 times consensus earnings estimates for 2020.”

Dzmitry Lipski, investment analyst, at interactive investor, Money Observer’s parent company, also believes the FTSE 100 may perform well, so long as key risks such as the trade war and Brexit go as hoped. He says:

“The UK market could very well outperform in the New Year, but this is largely dependent on the direction the recently fortified Conservative government takes in the UK-EU trade negotiations post Brexit and the fate of the US-China trade war.”

Lipski, however, is more bullish on mid and smaller domestically-focussed UK companies. He adds:

“The FTSE 250 and FTSE Small Cap indices have already experienced a post-election bounce, and this could continue in 2020.”

A poll conducted by Reuters in late November suggested a more muted optimism. According to the poll of 22 fund managers and investment analysts, it was predicted the index would be at around 7,500 by the end of 2020.

That was around 1.4% higher than the level the FTSE 100 was at when the poll was conducted. Since then, however, thanks to both the cooling of US and China trade tensions and the outcome of the election in December, the FTSE 100 is already sitting above that forecast.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.