FTSE 8% below September peak, but there are reasons to be positive

10th October 2014

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Investor confidence is being battered at the FTSE 100 continues its downward trajectory, sitting 8% below its September peak.

The benchmark index has suffered four days of consecutive falls leaving it 8% below its September peak and down 3% since Monday – it is currently at 6,344 with five hours of trading left.

In the midst of the sell-off, which has been fuelled by fears of a another eurozone recession and erased recent gains made across global markets, Hargreaves Lansdown said investor confidence has plummeted to its lowest level for two years.

The stockbroker’s confidence index shows the last time investor sentiment was this low the FTSE 100 stood at 5,800 and 10-year gilts were at 1.7% (now at 2.2%) and the eurozone was on life support.

‘Negative sentiment is rife in the market right now, and indeed if you look around the globe there is no shortage of troubles to worry about,’ said Hargreaves Lansdown senior analyst Laith Khalaf.

‘The eurozone is flirting with deflation, and while recovery in the US is gathering pace, the Fed is turning off the quantitative easing taps, for now at least. Markets are likely to fret while they watch central banks pass the relay baton onto economic growth, in the hope they don’t drop it.’

He added that troubles in the Middle East and Ukraine, as well as the spread of the Ebola virus are also concerning investors.

However, Khalaf said investors should not be concerned by the stockmarket falls.

‘While the headlines tell a sorry story, there are reasons to be positive about the stockmarket,’ he said. ‘In particular stock prices look reasonable when company earnings are taken into account, and when compared to holding gilts or cash.’

Reasons to be hopeful:

Khalaf said there are five reasons to be positive about the stockmarket:

  1. The US is the world’s largest economy and growing more strongly than anticipated. This week the International Monetary Fund upgraded its growth forecasts from 1.7% to 2.2%.
  2. Oil prices are at their lowest levels since June 2012 after a fall of 20% which is an effective tax cut for consumers and manufacturing companies.
  3. Stocks don’t look expensive relative to earnings, with the possible exception of the US.
  4. The dividend yield of the UK market is still attractive when compared to cash and long-term bond yields. The UK stockmarket is yielding 3.4% compared to 2.2% from 10-year gilts.
  5. Companies are still hoarding cash. The FTSE 100 is sitting on net cash of £53.3 billion, up from £37.9 billion last year. This suggests that companies are wary of the economic climate but they also have cash to spend if they see investment opportunities or act as a ballast in the event of a downturn.

Khalaf said investors should not get hung up on short-term market fluctuations and focus on the longer term outcome.

‘Clearly investing in the stockmarket comes with risks to capital, and you could get back less than you invest,’ he said. ‘But holding cash also carries risk, in particular the threat that inflation eats into your buying power. This is a particularly acute problem at the present time as inflation is higher than bank base rate.

‘Investors who are concerned about market levels can drip feed their money into the market gradually via a regular savings plan, thereby buying in any dips and levelling out their purchase price.’

 

 

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