The UK’s main index only reached its new highs under a month ago. Since then, it’s wiped out all of its gains in 2023. So, here’s why FTSE 100 shares are in the red, and whether now could be a great opportunity to snap up some bargains.
The banking crisis
It’s no secret that the recent collapse of Silicon Valley Bank (SVB) has sent shockwaves across the stock market. In fact, SVB’s demise has coincided with the fall of Britain’s flagship index. But what does a bank in the US have to do with FTSE 100 shares falling? Well, there are a couple of clear links.
Firstly, the fall of a bank as large as SVB tends to set off alarm bells, and it usually never ends well. As such, investors are fearful that bank runs may start occurring in the UK, causing a liquidity crisis. Consequently, bank shares have had a tumultuous week.
And with the financial sector making up the second-biggest chunk (17.8%) of the index’s constituents, it’s no surprise to see other FTSE 100 shares falling in sympathy.
Credit Suisse’s Lehmann moment?
Given the fragility surrounding banks, Credit Suisse exacerbated the current crisis. Having made the headlines last year for gross mismanagement and potential for going bust, this week’s events served as a stark reminder that the asset manager could still crash financial markets.
Saudi National Bank’s Chairman Ammar Al Khudairy said that the Middle Eastern bank will no longer be able to provide cash injections for Credit Suisse. This sparked fears of a liquidity issue given the recent events surrounding SVB.
This was then made worse by Chairman Axel Lehmann’s comments when he disclosed that the Swiss group had found “material weakness” in its financial reporting. In other words, internal auditors failed to identify potential risks to its financial statements.
Subsequently, trading in its shares was halted after it declined by as much as 30%. The FTSE 100 went on to see its biggest one-day loss this year, dropping 3.8%.
Should I buy FTSE 100 shares today?
Nonetheless, there’s a silver lining to the cloud of chaos. FTSE 100 shares — already known for their cheap valuations, are now even cheaper.
Valuations for bank stocks have been flattened. Therefore, it opens an opportunity for me to increase my stake in Lloyds. But more lucratively, Barclays‘ valuation multiples are trading at extremely cheap ratios, and could entice me to start a position as well.
| Metrics | Lloyds | Barclays | Industry average |
|---|---|---|---|
| Price-to-book (P/B) ratio | 0.6 | 0.3 | 0.7 |
| Price-to-earnings (P/E) ratio | 6.1 | 4.4 | 9.0 |
| Forward price-to-earnings (FP/E) ratio | 6.7 | 4.6 | 5.9 |
Some may scratch their heads at buying bank stocks at a time of mass uncertainty. However, those who’ve done their due diligence will realise that a repeat of SVB is unlikely to play out in the UK, at least for now. This is because British lenders have a much lower-risk deposit base and are much more secure.
Thus, when considering the ample liquidity and robust financial footing of FTSE banks, I could argue that the sell-off has been an overreaction.
That said, it shouldn’t go without saying that the near-term health of the banking industry still depends on what the Federal Reserve and Bank of England decide to do next. Fortune may favour the brave, but sometimes the cake just isn’t worth the candle. But for now, it may be worth me just taking a small bite.
