Looking back at history, some of the best returns on shares have come when the future looked to be at its bleakest. For example, there were very few investors who felt bullish about the stock markets potential in March 2009, but since then the FTSE 100 has risen by an incredible 82%. Similarly, in early 2007 there were murmurings about a banking crisis, but very, very few investors saw the depths of despair that followed, with the FTSE 100 crashing to as low as 3400 points.
Of course, the present time includes a number of key risks for the FTSE 100s future performance. Chief among them is the impending General Election. In fact, as well as the short term risk from having no clear winner and there being a period of negotiation, there is also a real risk of having a weak government moving forward. This could be in the form of a minority Conservative or Labour party government, and there is a chance that if this does occur then it will not last more than a number of months, thereby triggering a second election in a short space of time.
Furthermore, whether David Cameron or Ed Miliband is Prime Minister (PM) following the election, there is set to be a period of uncertainty for the UK. Should David Cameron remain as PM, there will inevitably be worries regarding the possibility of the UK leaving the EU, and the subsequent impact on business for the country. As such, inward investment to the UK could dry up and leave many companies feeling the pinch. And, should Ed Miliband become PM, his views on taxation could also hurt the business community, with policies such as a Mansion tax and an abolition of non-dom status having the potential to drive capital away from London and towards New York and Frankfurt.
Then there is the prospect of another Scottish referendum, since the SNP may hold the balance of power following the election, while a weak Eurozone continues to hold back the performance of the UK economy. In addition, challenges regarding Ukraine and the Middle East could also cause uncertainty among investors from a more global perspective, and could cause the FTSE 100 to experience a weak period of growth.
However, looking at the last two General Elections, it is interesting to consider how investors felt at the time. In 2005, there was great optimism regarding the FTSE 100s future prospects, with the index offering good value and recovering well from the dot.com bubble. Meanwhile, in 2010 the outlook was dire even though the FTSE 100 had rallied to 5,000 points in the previous fifteen months.
On both occasions, investor opinion was wrong, as the credit crunch occurred less than three years following the 2005 election, while the FTSE 100 is at an all-time high less than five years after the 2010 election. As such, while investors may well be right about the short term prospects for the FTSE 100 (i.e. a period of uncertainty), the longer term potential of the UKs leading index remains very, very bright.
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