The FTSE 100 could rebound up to the 5,000 mark by the end of next year, predicts Mike Lenhoff, chief strategist at investment manager Brewin Dolphin.
Lenhoff cites three reasons as the basis for last year's forecast. He predicted interest rates would be slashed earlier in the year but this expectation was quashed by the rise in commodity prices. Secondly, he anticipated an economic recovery and thirdly, he felt there would be attractive valuations underpinned by an improvement in earnings expectations.
Looking forward, Lenhoff again points to a trio of drivers which he believes will bolster the index. These are monetary and fiscal policies, the Fed's initiative to push down interest rates and falling global inflation.
He says: "We are witnessing the biggest policy response of our time from central banks and governments the world over.
"The likelihood now is the Fed will focus on driving long-term interest rates down with a view to lowering those on risk assets too, thereby pushing down the cost of borrowing and related funding costs."
Lenhoff says these developments are likely to prompt expectations of a recovery in economic activity and lead to a better outlook for corporate earnings.
"This should also help support valuations in equity markets and help the spreads in the credit markets narrow. Once this starts happening, a sustainable recovery in the equity markets is likely to follow," he adds.
Lenhoff concludes: "Falling inflation worldwide will boost real household incomes and this should provide something of a boost to the growth of consumer spending while on the corporate side, commodity deflation should help profit margins worldwide.
"Commodity price deflation could end up being a powerful stimulus for global demand growth. This is my case for thinking that, by the middle of next year, sentiment towards risk assets could be improving."IFAonline
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