Life as an investor is inevitably full of ups and downs. Right now is one of those ‘downs’ and evidence of this can be seen in the performance of the FTSE 100 during recent weeks.
Indeed, the UK’s major index has fallen by a whopping 6.8% over the last month alone. This puts it at the same level as it was in June 2013 and means that, since the start of 2011, it has risen by a measly 7.5%.
Of course, things could get worse before they get better. With this in mind, here are the major reasons for the FTSE 100’s recent woes and why further falls cannot be discounted.
Eurozone Weakness
The major reason for recent falls in the FTSE 100 is uncertainty surrounding the Eurozone economy. Unlike their US and UK counterparts, the ECB has done comparatively little to strengthen the European banking sector or the European economy. As a result, the threat of deflation remains very real and the Eurozone could easily slip back into a moderate recession if further stimulus is not introduced.
The knock-on effects of a Eurozone recession would be impossible for the rest of the world to avoid. While a number of companies have attempted to reduce their exposure to the weakest growth region in the world in recent years, the Eurozone is still a major chunk of most companies’ top and bottom lines, so a recession is highly likely to affect earnings figures moving forward. Downgrades to earnings forecasts are likely to mean downgrades to share prices in the short term, too.
US Stimulus
The FTSE 100 is also being hurt by uncertainty surrounding the end of the Federal Reserve’s monthly asset repurchase programme. Many investors believe that this has been the major cause of the recent all-time highs that have been recorded on the other side of the pond and, with the programme due to end imminently, the future price level of the S&P 500 (and, by default, the FTSE 100) looks very uncertain.
Russian Sanctions
Although not as dominant of news headlines recently, Russian sanctions remain a real threat to the FTSE 100. The main reason for this is that trade between Europe and Russia is likely to be hurt over the medium term, which could have a negative impact on both economies. With the Eurozone’s recovery being highly precarious, as mentioned, Russian sanctions could prove to be enough to push it into recession.
Looking Ahead
While the short term could prove to be a highly challenging period for the FTSE 100, it could also be a perfect time to buy shares in high-quality companies when they trade at even better prices.
