FTSE 100 enters technical correction territory – what should investors do?

20th August 2015


It appears investors are starting to lose confidence in the UK market as Thursday saw the FTSE 100 index fall into technical correction territory having collapsed by more than 10% from its recent high of 7,122 on 27 April.

Experts are however calling for calm, claiming that behind the fall in the blue-chip index lies a lot of important detail for investors to consider.

Laith Khalaf, senior analyst at Hargreaves Lansdown said: “This year has really been a tale of the good, the bad and the ugly for the UK stock market. Housing and construction stocks have done very nicely, as have mid-caps, while the oil and gas sector has continued to suffer share price declines. At the ugly end of the spectrum, the mining sector has rolled over and is playing dead, losing a fifth of its value so far this year.”

But he pointed out that active fund managers in the UK have actually enjoyed a decent year so far, on average returning 6% for investors, compared with the FTSE All Share which has returned 2.1%.

“Partly this is down to their mid cap holdings, but a lack of exposure to the oil and mining sectors has also helped, proving sometimes out-performance is as much to do with the companies you don’t own, as those that you do,” added Khalaf.

However he believes that the UK market still looks fair value based on the earnings it is generating, adding that corrections of the sort witnessed in recent months are an occupational hazard for shareholders.

Khalaf said: “When they occur, investors should think about topping up rather than selling down.”

Top and bottom performing stocks in the FTSE 100 in 2015

Total return 2015

Taylor Wimpey PLC


Mondi PLC


Persimmon PLC


Barratt Developments PLC


Direct Line Insurance Group PLC


Aberdeen Asset Management PLC


Weir Group PLC


Antofagasta PLC


Anglo American PLC


Glencore PLC


What should investors do?

Looking ahead, Khalaf asserted: “It is impossible to predict which direction markets will move in the short term. However, the question for investors shouldn’t be where markets will be in two weeks’ time, but in five to 10 years’ time. Over the long term the best time to buy is usually when it feels really uncomfortable, and on that basis adventurous investors with a long time horizon could look at the current situation as an opportunity.The outlook for the UK market still looks favourable in our view, with economic growth healthy, but not strong enough to force interest rates upwards too quickly.”

He explains that the FTSE All Share looks close to fair value, standing at a forward P/E ratio of 15.4 with a prospective yield of 3.8% but that does not mean the index does not have further to fall.

Khala said: “Both oil and gas stocks and mining stocks have fallen significantly and may start to attract investor attention, particularly when you consider both BP and Royal Dutch Shell are now trading on a prospective yield of 6.9%. However these companies come with a risk warning attached; they are largely at the mercy of global commodity market and the reason yields look so high is the market isn’t entirely convinced dividends will be delivered.”

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