Why 2016 is shaping up to be a great year for the FTSE 100!
Ask most investors what they think of 2016 thus far and they'll probably respond with a negative answer. That's understandable, since the FTSE 100 has been hugely volatile in the first 16 or so weeks of the year. It has traded as low as 5,536 points and as high as over 6,400 points in a less than four-month period. And with there being huge uncertainty surrounding China, US interest rate rises and the prospect of a Brexit, many investors may be uncomfortable with holding stocks in the index at the present time.
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Despite all of this, the FTSE 100 has risen by 1.5% since the turn of the year. That's a good return by historical standards, since it equates to an annualised gain of 5%. When its dividend yield from the start of the year of 4% is added to this return, it boosts the FTSE 100's total prospective annualised return to a figure of 9%. This is in line with its average annualised gain since inception in 1984, which means that the FTSE 100 has done exactly what it was meant to do at the start of the year. In other words, produce an annualised total return of around 9%.
Uncertainty is a fact of life
Clearly, the level of volatility of the FTSE 100 in recent weeks has been a cause for concern. Unfortunately, this uncertainty is unlikely to go away throughout the rest of the year. In fact, uncertainty will never truly go away, since the FTSE 100 is by definition a risky asset. But the potential rewards it offers have tended to adequately compensate its investors for taking the plunge and piling into the index.
With the EU referendum around two months away, the next couple of months could be particularly volatile. It's likely that the polls will swing between predicting one thing or another and this could have a major impact on the FTSE 100. Further yo-yoing of the index is therefore very realistic over the next couple of months.
Opportunity knocks
This presents an opportunity for long-term investors to buy-in at discounted prices. While leaving the EU would mean even higher uncertainty in the short run, the reality is that most of the FTSE 100's companies are global and it's the global outlook that really matters to them and their investors. Whether the UK economy is performing well may not count as much as many people think in a world where the performance of the US and China dominates everything else.
On the topic of the US and China, both countries seem to offer excellent long-term growth prospects. For example, the US continues to post generally positive economic figures, while China is quickly transitioning to its next stage of growth as a consumer-focused economy. This bodes well for the FTSE 100's future returns and while it may not always feel as though it's making progress and generating top-notch returns, the FTSE 100 has an excellent track record that's thus far living up to in 2016.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
