Will the FTSE 100 crash?

Dr James Fox takes a closer look at the FTSE 100 after the index was shaken following the Silicon Valley Bank fiasco and concerns about bond losses.

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The FTSE 100 has pushed downwards after a series of shocks in the banking sector spooked the wider market. Investors’ attention had been brought unrealised bond losses and concern about the rest of the financial sector grew.

So, is this the start or something big, or is this just a storm in a teacup?

What happened?

FTSE 100 stocks in the financial sector, but predominantly banks, have been falling. Silicon Valley Bank panicked investors after the market realised it was sitting on billions of unrealised bond losses, due to interest rate rises.

The market grew concerned about bonds held by other banks. However, the industry has brushed off these concerns, highlighting that Silicon Valley Bank was unique in its exposure to the tech sector. But fears were compounded by the implosion of Credit Suisse, which was then taken over by UBS.

UK financial stocks are down considerably. For example, HSBC, which bought SVB’s UK operations for £1, was among those worst hit — falling 18% over a month — despite the acquisition only being a small addition to a huge, well-capitalised and well-regulated bank.

So will there be a crash?

Maybe there will be a crash in the future, but this recent challenge to the financial system is unlikely to lead to one I feel, in the UK at least.

For one, UK stocks don’t trade with particularly high multiples as it is. There really isn’t that much room for share prices to fall, in my opinion. For example, Lloyds now trades with a price-to-earnings (P/E) ratio of just 6.3. That’s particularly low and much lower than US counterparts.

This is broadly the case across the banking sector, with even the more growth-oriented banks, such as HSBC, trade at just 8.8 times earnings. Earnings broadly remained positive in Q4 for the sector as a whole.

US stocks face challenges

However, US stocks typically trade with higher valuations that UK stocks. The FTSE 100 average P/E is around 12, while the S&P 500 is 18. It’s not a perfect comparison, but there are definitely concerns that US stocks have further to fall.

Legendary British investor Jeremy Grantham — the co-founder of GMO, an investment management firm established in 1977 — has suggested that the S&P 500 will fall 16.7% during 2023. Considering the index pushed upwards at the beginning of the year, there could be a steep decline. This SVB fiasco could be the start of a correction.

However, there’s an upside. It seems likely that the Federal Reserve will hike interest rates more slowly after SVB sent shockwaves through the banking and tech sector. Higher rates are meant to slow economic activity and bring inflation down.

But if rates get too high, the current tailwind could turn into a huge headwind. Even higher rates could lead to demand destruction, higher impairment charges on bad debt, and unrealised losses on bonds.

I’m staying away from the US market, and focusing on the UK, especially with the index down 8% over the month.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. James Fox has positions in HSBC Holdings and Lloyds Banking Group Plc. The Motley Fool UK has recommended HSBC Holdings and Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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