The FTSE 100 is up by around 600 points in 2016. It has therefore been a highly successful year for the index. Being able to record such a strong performance despite the risks posed by Brexit and a Trump Presidency may make investors feel that the FTSE 100 can overcome any challenge it faces. However, this may not be the case. Here are three reasons why the index is set to slump in 2017.
The FTSE 100 may have coped extremely well thus far with Brexit. However, the process has not really begun. The UK is yet to invoke Article 50 of The Lisbon Treaty and once this takes place, it will commence a period of intense uncertainty for the UK and European economies.
Clearly, the FTSE 100 is not UK-focused and so it is more dependent upon the global environment than the local one. However, weakness in the EU has the potential to spread across the globe and cause investor sentiment to come under pressure. And with there being a clear disagreement between the UK and EU on freedom of movement and access to the single market, the negotiations may drag on for over two years.
As such, once the realities of how long-winded, challenging and uncertain Brexit will be come to the fore in 2017, the FTSE 100's performance could suffer.
Donald Trump may not have caused a decline in the value of the FTSE 100 yet, but he has the potential to do so next year. His policies may not be the exact same ones as he discussed during the election campaign, however they are likely to cause significant change on both an economic and social level. This could cause uncertainty among investors. Since investors have historically become increasingly risk-averse during periods of intense change, the FTSE 100's performance could suffer.
Trump's election victory also presents challenges in terms of global political risk. US relationships with Russia and China in particular could change in future, which could lead to an increasingly risk averse attitude among investors. Therefore, risk-on assets such as shares could fall.
While the world has been focused on Brexit and Trump, it seems to have overlooked China's falling growth rate. Earlier in the year, concerns about China's economic performance led to a correction in the FTSE 100's price level and there is the potential for a repeat of this in 2017.
Although China continues to offer exceptionally high long term growth appeal as it becomes increasingly focused on consumer goods and services, its transition away from a capital expenditure-led economy is unlikely to be frictionless. This could cause severe bouts of concern among investors regarding its long term future. And if trading disagreements with the US exacerbate in 2017, doubts regarding the global growth outlook could begin to surface.
In such a situation, the FTSE 100 may fall. While this will lead to paper losses, it could also provide an excellent buying opportunity for long term investors. As such, 2017 could be a tough year for shares, but a great year for long term investors.