So far this week, the FTSE 100 has struggled. It opened on Monday around 7,130 points, but closed yesterday around 6,930. This drop of 200 points represents a fall of around 2.8%. Obviously as an index, there were companies that fell a lot more than 2.8%. Given the reason for the crash, I actually think this is a good opportunity to buy the dip in the FTSE 100 stocks.
Why did the stock market crash?
The main reason of concern for investors is the potential for rising inflation. Over the past year, UK inflation has been averaging around the 0.5%, so not too much of a worry. However, in recent Bank of England meetings, inflation expectations have been rising. One factor involved in this is the large amount of stimulus that is being pumped into the economy, both from a fiscal and a monetary position.
The aim of this is to get the economy going again. This is fine, but one downside of a growing economy is higher inflation. Unfortunately, higher inflation leads to higher interest rates. Higher interest rates make it more expensive for FTSE 100 stocks to raise new debt. It also means consumers might decide to save rather than invest if interest rates are high.
The above is a long chain reaction, a bit of a slippery slope. Yet the stock market is very forward thinking, and so yesterday was a case of some investors getting a little bit scared of the potential further down the line, and selling out.
Why I think some FTSE 100 stocks look cheap
I completely accept that rising inflation coupled with rising interest rates could hurt the FTSE 100 index. But we aren’t there yet, and not even close. I think the mini crash this week is an overreaction. Some FTSE 100 stocks have seen a sharp drop that I don’t feel is valid.
For example, Flutter Entertainment saw its share price fall 6.7% so far this week. Is this an overreaction? It recently released strong Q1 results. Revenue rose 41% in the first three months to March.
In terms of debt levels, 2020 results show that it has risen to circa £2.8bn. I think this is the reason for the large fall this week, as investors are concerned about financing this debt with higher interest rates.
On closer inspection though, this is only a leverage ratio of 2.3x, with a commitment to reduce it to 1-2x in the medium term. Therefore, I think this FTSE 100 stock looks cheap.
Another stock that took a hit was Rightmove. This is more logical, as higher inflation and rates will make it harder and more expensive to buy a home. But does this warrant a 5% fall in two days? I don’t think so. The momentum of the housing market is very strong. There’s also a good correlation between the state of the economy and the housing market.
With UK GDP for March beating expectations at 2.1% (versus 1.4% growth expected), I think the property marketplace serviced by Rightmove will increase in demand, not decrease. As such, I also think this FTSE 100 stock looks cheap right now.
