The FTSE 100’s descent below the 6,000-point marker last week comes as little surprise given the murky global economy.
Britain’s blue-chip index sank as low as 5,952.78 points on Friday, the cheapest level since the summer and extending the severe volatility of recent months. It doesn’t seem that long ago that we were celebrating the FTSE 100 hitting a record above 7,000 back in April, before fresh fears over the Chinese economy sent it scuttling lower to August’s multi-year lows.
China keeps on sneezing
And there’s certainly plenty more fuel in the tank for the FTSE 100 to drop further, in my opinion. Industrial data from Beijing released on Saturday may have been more encouraging – activity on China’s factory floors rose 6.2% in November, the best result since June – but broadly speaking, news flow from the Asian goliath continues to worry.
Indeed, the latest manufacturing PMI survey for November came in at a three-year nadir of 49.6, while exports slumped by an additional 3.7% last month, the fifth successive monthly drop.
Investors will be looking for a rapid improvement in Chinese economic indicators, particularly in light of constant (and so-far-ineffective) money-pumping by the People’s Bank of China, before I would propose a clear course higher for the FTSE 100.
Commodities getting clobbered
Against such a backdrop, and given the index’s huge weighting towards those involved in minerals production or drilling for fossil fuels, there’s plenty of room for further falls in the FTSE 100.
China is the world’s largest iron ore and copper consumer, for example, and is just a few steps behind the US as the world’s largest crude oil user. Meanwhile, output levels across commodity classes continue to run wild as producers aim to grab market share, adding further pressure to precarious supply/demand imbalances.
Indeed, Brent crude’s collapse below $40 per barrel last week was a major driver behind the FTSE 100’s nosedive late in the week, not to mention iron ore prices striking their lowest for more than a decade. And oil’s further drop to around $36.50 on Monday, a six-and-a-half-year nadir, shows that the sell-off is far from over.
Diversified giants Glencore and Anglo American have both conceded almost three-quarters of their value since the start of 2015, while BHP Billiton and Rio Tinto have also been major fallers. And the problems aren’t confined to the producers – weak demand for its oil services has also driven shares in engineer Rolls-Royce through the floor in 2015, the stock conceding 35% of its value since January.
So what next?
Should the alarming fall in the FTSE 100 (the index is down 8.9% this year) prompt investors to head for the hills?
Certainly not, in my opinion. While wider macroeconomic issues can cause even the highest-quality stocks to shake, just ask investors in housebuilder Taylor Wimpey, asset manager Hargreaves Lansdown or insurer Direct Line whether they should have sat on the sidelines. These stocks have advanced 42%, 41% and 37%, respectively, in the year to date.
Besides, the FTSE 250 index has actually risen 5.2% since the turn of the year. Given the index’s broader constituent base, it could be argued it’s a fairer reflection of investor appetite, not to mention the health of the wider economy.
And of course recent weakness in the FTSE 100 provides opportunities to snap up a bargain. Fresh volatility can naturally be expected as China cools and Federal Reserve monetary tightening takes off. But as always, a patient and measured approach to investing can still provide plump rewards.
