What is happening to the FTSE?
Having hit a 14-year high in early September, the FTSE has dived by over 10% in six weeks. Why?
Over the past six weeks, the FTSE100 has undergone a long-overdue correction.
Having hit a 14-year high back in early September, the FTSE has now dived 800 points. What has caused previously optimistic investors to rush for the exits, driving down share prices across the board?
Slowing growth
With the Eurozone struggling to grow this year, the International Monetary Fund has downgraded its forecast for 2014 global growth to 3.3%, down from an earlier prediction of 3.7%.
Slowing global growth directly translates into reduced expectations for corporate revenues and profitability. With growth likely to be patchy, weak and uneven for some time to come, shareholder returns may be subdued next year, as well as this.
The end of the mergers and acquisition boom
Since early 2013, stock markets have experienced levels of activity not seen since the boom years prior to the global financial crisis of 2007/09. Over the past 12 months, more than three dozen private companies have listed their shares on the main market of the London Stock Exchange. In addition, UK and US markets have seen frenzied mergers and acquisition activity as companies rush to take over weaker rivals.
However, this gravy train for investment banks and corporate advisers seems to have come to a sudden halt. In recent weeks, a number of high-profile IPOs have been shelved, including the flotation of Aldermore Bank, while Virgin Money has decided to delay its own float. There are rumours that upmarket shoemaker Jimmy Choo may be forced to pull its initial public offering.
The October effect
Veteran investors will know that some of the largest market crashes in history have come during the month of October, most notably in 1929, 1987 and 2008. What's more, market history shows that long-term returns in October are the lowest of any calendar month.
As autumn comes round each year, some old hands are quick to remind other investors of the peculiar peril of this month.
Global instability
There is plenty of global instability which may spook investors too, from fears of an Ebola epidemic to the prospect of more instability in the Middle East thanks to the rise of Islamic State. And don't forget Russia - investors have been pulling huge sums out of Russia, wary of further hostilities with the West, starving the country of foreign investment and sending the Russian rouble plunging to record lows against the US dollar.
As a result, the Russian economy, which is world's eighth largest and already struggling with a plunging oil price, is now sliding back into recession.
What this means for investors
So far, the FTSE 100 has undergone what is usually described as a 'market correction', a fall of up to 10% from its high. For this downward path to be described as a full-blown 'bear market', the FTSE would need to lose a 20% of its peak. Whether or not this will happen remains to be seen, but share prices are already considerably lower than they were in the first week of September.
Thanks to this correction, the FTSE 100 now has a dividend yield of around 4%, a level which history suggests is attractive to long-term investors seeking income. Likewise, value-hunting investors will already be rooting among the fallers, bargain-hunting for cheap shares.
This market correction may prove an ideal opportunity to top up their existing shareholdings at lower prices. Indeed, after almost five years of rising markets on both sides of the Atlantic, this downturn is a healthy opportunity for markets to let off steam, before resuming their long-term upwards path.
More on investing:
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"Having hit a 14-year high in early September, the FTSE has dived by over 10% in six weeks. Why?" I think you have answered your own question, Cliff. The market has collapsed because it was at a 14 year high. I know most people clear their bank accounts and buy shares when the market is high. I have made just about every investing mistake there is over the years. That's the one I never made. It is obvious that if the market at a record high, there is only one way it is going to go... "And don't forget Russia - investors have been pulling huge sums out of Russia, wary of further hostilities with the West, starving the country of foreign investment and sending the Russian rouble plunging to record lows against the US dollar." Oh, come off it, Cliff. It's got more oil than anybody else. It's got the best government it has had in its entire history. It has some of the biggest companies in the world. It has the most resilient and wonderful people in the world. They are still up and running in sub zero temperature, while in Blighty, a few flakes of snow, and the whole country grinds to a halt. It has some of the most underestimated culture in the world and the most underestimated cuisine in the world. If you don't buy when the market is high, then, as they say, the time to buy is "when there is blood on the streets. While others have fled, I have been investing more. As for the stock markets, a crash is more likely when the mom and pop investors start piling in big time. I have seen little evidence of that. My own personal opinion is that this correction will be forgotten when the Santa Claus rally comes in December. I am investing more in my dividend payers while their prices are dirt cheap, and their yields are high. As a result, the Russian economy, which is world's eighth largest and already struggling with a plunging oil price, is now sliding back into recession.
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As a small investor AVOID INDIVIDUAL SHARES - E.g.: Tesco! Here's how to make some money: Buy ETF LUK2 which follows the FTSE 100 levered x2... it's about 19750 pence (or UK3L ==> x3) with the FTSE 100 ~6250 pence... If you buy 100 for just under £20k then each penny rise gains £1... ...so rising to 19850 pence gains £100 - dealing charges... I use ShareDealActive (01892 700800) @ £9.50 flat per trade. (N.B.: LUK2 52 week high is 24134 - wouldn't wait for that price, but you would gain about £4300 on less than £20k!) There's no stamp duty and the ETF is isa-able. LUK2 incorporates dividends, so 4% p.a is levered to 8% p.a. This is a safe way to make capital gain - UNLESS you can convince me that the FTSE will NEVER rise again NOR pay dividends. You now know my secret gained after thirty odd years investing! It's easy when you know how!
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Some fair points from @mike10613 but don't be fooled into thinking that the other parties are any better. All the time that we have professional politicians running the country, it will not be in the best interests of the electorate. Also, remember that a lot of the "posh boys" have extreme left wing ideas as well - which was disastrous during the last government. Certianly, it is time for a change. r.
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19 October 2014