MENU

Will Europe Sink The FTSE 100 To 5,000 points?

What a week for bond and equity traders alike in Euroland! I lost 2.96% of value on my bond holdings in a single trading session on Tuesday.

I was not invested before the latest bond correction — I built a long position on the long-end of the yield curve of Europe’s periphery last month after prices had plunged a lot. 

When I say a lot, I mean it. Many bond traders recorded a 20% paper losses in just a few days, as prices swiftly dropped from their record highs.

Meanwhile, the FTSE 100 is down 1.1% since Monday. 

Praying Foy A Sunny Day

The rainy days may not be over yet. As a Greek exit nears, I hold faith in fixed-income securities. But the old adage  of “volatility spells opportunity” may not apply this time around — liquidity is thin, too thin. Either way, you could be in a safer pair of hands with certain stocks. 

It’s been a stint of about 2,250 days of good weather for equity investors since the market’s rally started in March 2009 — the FTSE is up 96% over the period. Its rapid ascent has become increasingly less effective since May 2013, though, and shockwaves from Europe could hit our equity portfolios.

Has that time come? 

First off, a price target of 5,000 points for the FTSE 100 isn’t out of question.

That implies a 28% drop from its current level, which is more than a typical market correction. The last time it occurred, it took 52 weeks for the FTSE to drop that fast, but the last time the whole banking system was going under.

Before that, when the tech bubble burst, it took the FTSE almost 100 weeks to lose 28% of value.

But now, it could be the turn of whole countries or Central Banks. It could be much worse indeed. 

Well, the way I see it, the FTSE 100 remains a long-term, defensive play on volatility, as least once it’s compared with main European indexes and low-yielding bond prices in Europe’s periphery.

Germany is not immune, either, as trends for bunds have clearly shown in recent weeks.  

Yield 

The more the FTSE falls, the cheaper its relative valuation will become for the same amount earnings. So if that’s the case, there’d be two options — either earnings estimates will remain intact or they’ll be tweaked down.

I am not bothered, and nor should investors who look for safety, as the FTSE 100 is not even fairly priced at present — consider what a bargain it’d become if it lost almost 2,000 points!

Earnings multiples would plummet, but earning yields would rise, assuming constant earnings. The bad news is that not all of its main constituents of the FTSE 100 — such banks and miners —  seem to behave in a very consistent manner. Banks are insanely priced, while miners are grounded, for instance. 

The good news, though, is that the UK is not Europe, and you’d have time to cash in before the world ends. 

So, why bother -- Lady Luck will look after you if you have done your homework! "I'll tell you why," one economist recently told me. "My savings are at stake!"

That's not too bad. Several equities already trade below fair value: consider many of the value stocks that have been selected in a FREE report by our analysts -- with most of them, you'd have consistently beaten the broader market by 10% a year for a very long time. 

In short, double-digit returns could easily be achieved -- we focus on fundamentals, low leverage, high margins and economic moatsclick here right away to learn more, for instance, about a consumer giant whose stock is up 12% this year, and whose dividend yield is rising fast. 

 

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.