Why I’m Not Bothered About A 10% Plunge In The FTSE 100

A market correction could be just around the corner, the bears insist — but should we really care? If so, are our equity investments going to depreciate at a fast pace any time soon? 

Firstly, there are no signs that the FTSE 100 will fall like a stone. In fact, it’s quite the opposite, as news about the Shell/BG‘s $70bn merger suggests today.

Secondly, there are many solid dividend stocks in the market that do not look terribly overpriced right now, and this is why short-term trends in the FTSE 100 don’t mean much to me. 

So, buy  — with a good understanding of fundamentals and sector dynamics! — is the obvious recommendation I have for you. 

Neil Woodford’s Downbeat View 

Neil Woodford said on Tuesday that the world was experiencing “a sharp deterioration” in earnings forecasts, as the impact of the strong US dollar and “a run of weaker-than-expected economic data” works its way into expectations.

“In effect, this is a 10% downgrade to global earnings as the normal start of year optimism has very quickly evaporated from expectations,” he added.

Will all these elements determine a meaningful correction in the FTSE 100? 

It’s not so easy. 

Earnings, Rates, IMF, Index & Mexico!

Resources and banks stocks —  the main constituents of the FTSE 100 — aren’t growing much organically, and although it’s possible that they will be faced with a few volatile trading sessions into the summer, I would not expect banks to lose more than 15% of value this year, or resources to plummet from their current levels. 

But even if I err on the side of caution, either the FTSE 100 or more defensive stocks will still be a safe place where you could invest part of your savings over the long term. This is not to say that I would structure my portfolio replicating the benchmark index, but it testifies to the possibility that value would be up for grabs even if trading conditions get tougher. 

From Reckitt to Unilever via tobacco and and certain pharmaceutical stocks, you could still fetch double-digit returns annually by betting on companies whose financials are incredibly solid, and whose yield is broadly in line with that of the market at about 3%. 

Earnings are down, but the market is still up: that’s nothing usual at a time when interest rates are low. Moreover, as Mr Woodford acknowledged, the “relationship between earnings and price is not always a strong one”.

“Mexico is selling the world’s first 100-year government notes in euros and its third so-called century bond as the nation seeks to lock in lower borrowing costs amid the European Central Bank’s unprecedented stimulus,” Bloomberg reported today. “The country is offering debt due in April 2115 to yield about 4.5%,” according to one source!

Well, this is yet another sign of loosening credit conditions around the world.

In this context, the UK is in a sweet spot. 

More specifically, I think that the balance sheet and the cash flow statements have become more important than the profit and loss statement right now — because everybody knows that growth is not easy to achieve, while working capital management is under scrutiny at companies that are in restructuring mode. 

The IMF said earlier this week that it forecast low economic growth around the world. How bad is that?

Well, it will likely be a great opportunity for big corporations to combine their assets and widen the gap with their smaller competitors in order to preserve the yield they offer to investors — all of which will likely benefit the main index, which has de-coupled from the S&P 500 in recent years but could swiftly recoup some its lost value. 

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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.