FTSE 100 in ‘technical correction’ territory as it falls 10% from recent high

16th October 2014

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The FTSE 100 index of the UK’s top firms fell a further 100 points on Thursday, taking it into technical correction territory.

The blue-chip index hit a recent high of 6,878 on 4 September but it has since fallen by more than 10%.

The dividend yield on the UK market is now over 3.6%, while the 10-year gilts – government bonds – are now yielding just under 2%. Year-to-date the FTSE 100 is down by 5%.

But is this a buying opportunity, as Laith Khalaf, senior analyst, at Hargreaves Lansdown highlighted that the cyclically adjusted P/E (price/earnings) ratio of the UK market suggests UK stocks are now actually cheaper than they were in 2003.

He added: “The FTSE 100 has now suffered a technical correction, falling over 10% since the beginning of September. Markets are in fretful mode, heightened by the spectres of 2008 and 2011, which still haunt investors.”

However, Khalaf cautioned that long term investors should recognise there will be times like these which are uncomfortable but “the best policy is to grin and bear it”.

He said: “Indeed, they might well see a glimmer of opportunity in current stock prices. The UK market now looks cheaper than it did at the bottom of the bear market in 2003, according to one long term valuation measure.

“Things could get well get worse before they get better. But when equities are yielding almost twice as much as gilts, you do have to stop and think where you want your long term savings invested.”

Experts often assert that the best days in equity markets often tend to occur during times of high volatility but understandably investors are often scared into selling during periods of market weakness, meaning they miss the best days in the market. Such actions however can seriously damage long-term cumulative returns asserted Dominic Rossi, global chief investment officer, Fidelity Worldwide Investment.

He added: “In terms of the longer-term market cycle, we remain in a bull market which I think has another couple of years to run. The economy and market is mid-cycle and a mid-cycle correction would offer an opportunity for investors to get into the market at reduced valuations.”

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