Are stock markets preparing for a meltdown scenario? If so, the FTSE 100 will hit 6,000 points sooner rather than later. That’s a key support for the index, which hit a 52-week low of 6,328 today.
Here at the Fool, however, we don’t believe much in technical analysis, as you may know. In fact, based on fundamentals, oil producers, miners and banks could well stage a rally in the next few weeks.
Let’s hope so. That’s pretty important: they are the main constituents of the index with a combined weighting of almost 40%.
Volatility
Volatility surged 24% on Thursday. In the last 10 days, the fear gauge has been testing record highs for the year, but is still pretty low at 18.7. Anything below 20 is manageable, although things may get a bit more complicated if it rockets to, say, 25 or 30.
Volatility’s up, oil prices are down. Financial markets are acting erratically, aren’t they?
Well, the word doesn’t end even when, like on Thursday, the S&P 500 records one of its worst performances for the year. It just becomes a much less nicer place to live in.
What’s Next?
The FTSE 100 is more likely to go up than to plummet, the bulls argue. Why?
Because the banks are still troubled but they have much more solid balance sheets and profits for large companies are mostly backed by strong capital structures. Should anybody worry then? No really, until interest rates and spreads on debt remain low, the bulls insist.
The banks are still too big – look at HSBC’s assets base – but they have built up a pretty decent capital buffer. Never mind that it’s the assets side that counts most in the banking sector…
UK-listed Stocks: A Reality Check
Several companies listed on the London Stock Exchange are in restructuring mode.
Take retailers such as Tesco, Sainsbury’s and Morrisons, neither of which knows exactly how it will make it through the second half of a 10-year business cycle that is now faced with several headwinds into 2017 — from rising interest rates to default rates that will unlikely remain subdued forever.
Miners are not better off, as testified by Glencore’s approach for Rio Tinto. Such a record deal, if it occurs, will hinge on synergies, i.e. cost cuts. Anglo American and BHP Billiton are pruning their corporate trees, but it won’t be easy.
Back to the banks – oh, the banks.
Analysts are banging their heads against the wall to find value in a sector where nobody wants to come to terms with the idea that while upside from current levels could be 5% to 10%, downside could be 40% or more. Regulatory and litigation risks pose a real threat to earnings and payout ratios for years to come.
Barclays is not as good as Lloyd’s, but Lloyds is not as appealing as Royal Bank of Scotland. It’s very easy to forget that all three are in restructuring mode, for one reason or another.
Elsewhere, I have just had a chat with a senior banker about the industrial sector. He singled out Weir, but other large industrial conglomerates in the UK are cheap, he added. Still, they struggle to gather interest from investors.
Who’s been left out? Barring GlaxoSmithKline, most pharmaceutical companies have a problem: their equity valuations price in M&A premiums. The same applies to SABMiller and Diageo in the beverage sector. So what?
Volatility is not here to stay and if the market roars back, most traders will enjoy the ride on Monday. It’s your own risk to be a bull these days.
