At the moment, there is some speculation that we could be on the verge of a financial market crash. Those who share this view believe a crash could be caused by a variety of reasons. This includes the current over-valuation of share prices and the general market volatility on display in the opening weeks of 2021.
I always advocate caution when considering any new investment opportunities. Even when indices are making positive gains, investors and traders must be prepared should a bull market suddenly surrender to the bears. This seems to be the experience of the Dow Jones this past week, though it has been able to recover from the initial loses incurred on Tuesday morning.
So, what is likely to be in store for investors with positions in the FTSE?
Overall, there are plenty of reasons to be bullish on the future performance of the FTSE. While the UK is still in the process of overcoming the challenges posed by the COVID-19 pandemic, it has also been able to resolve certain issues that could have triggered significant market volatility if poorly handled.
For example, the UK has avoided a ‘no-deal’ Brexit situation; and while there have been some teething issues during this transition, the fears of a market crash have not transpired. Given the volume of negative commentary surrounding Brexit, this is an important development and something that shouldn’t be overlooked.
Indeed, even with the latest UK GDP data for Q4 2020 being the worst in around 300 years, it was by no means as bad as what was initially expected. As the reality was better than the expectation, the news actually resulted in a significant boost for the pound sterling.
Positively, the fast roll out of the UK’s COVID-19 vaccination programme means we could see the end of social distancing measures by 21st June. With 25% of the UK population now vaccinated, the programme has been a success and could mean we will see the end of the pandemic by Q3 2021 should current targets be met.
Finally, the FTSE 100 is still in the process of recovering from the initial losses incurred in the first half of last year. Positive gains are being made, but there are still significant gaps to be filled should the FTSE 100 return to pre-pandemic levels.
Overall, the above summary demonstrates just why investors and traders should be optimistic about the future performance of the FTSE over the coming months. We all know that nothing is linear when it comes to investing, and we could indeed be seeing periods of market correction. There are also other events to consider, such as the possible introduction of negative interest rates by the Bank of England and an extension of the COVID-19 lockdown should the number of cases rise.
Nonetheless, there are a clear number of factors that put the FTSE in a position of strength as it continues to recover from the pandemic and adjust to the realities of Brexit.
Giles Coghlan, Chief Currency Analyst, HYCM