Here’s Why You Should Buy The FTSE 100 This Week

Last week wasn’t a good one for the FTSE 100, losing 2.4% overall and dipping to a 52-week low of 5,499.5 on Thursday 11 February. Although it’s recovered a little since then, to 5,862 points, London’s top index is now down 15% over 12 months. Why?

It’s usually fear and uncertainty that cause investors to flee shares, and that’s coming from multiple directions. Cheap oil is scaring people, though I really don’t know why — oil explorers and producers don’t like low prices, but it’s good news for most companies who are consumers of the stuff.

And oil at around $34 a barrel is hurting so many producing countries that it’s simply not sustainable for long — it’s too early to tell whether the strengthening in recent days after rumours of some OPEC action will continue, but a year from now oil will surely not be this cheap.

The economy is fine

The receding likelihood of a UK interest rate rise is also worrying a lot of folk, as it suggests that company earnings growth won’t be as high as hoped. And the slow speed of recovery in the eurozone only adds fuel to that particular fire. But again, I see overreaction.

Companies are only growing their earnings at a few percent per year, are paying dividends of 3% or so and keeping them rising ahead of inflation. I just don’t understand why people think that’s so bad. And the eurozone? Well, it’s sluggish for sure and I expect there will be crises ahead, but it’s recovering and it’s no reason to shun great UK shares. US economic figures aren’t yet as good as many had hoped but again, things seem to be ticking along just fine with a longer-term view.

Chinese slump

China is a more serious issue and its economic slowdown is surely going to be deeper and more prolonged than previously feared. But why should that mean a 5% dividend yield from National Grid isn’t worth having? Or that we should turn our noses up at EPS growth forecasts of better than 40% from ARM Holdings?

Miners are hurting from the slump in commodities prices, made worse by slowing Chinese demand? Why not buy housebuilding and construction firms instead, while they’re enjoying cheap raw materials? Barratt Developments is on a forward P/E of only 10, with double-digit EPS growth and a 4.9% dividend yield forecast. And Kier Group is offering a 4.8% yield on a P/E of 12, with earnings growth also on the cards.

Banks and financials look very cheap too — insurer Aviva is on a 2016 forecast P/E of just 8.5, with a 4.8% dividend predicted, and even the super conservative Prudential is on a P/E of only 9.6.

Buy when others are fearful

When markets overreact to crisis, they present rational long-term investors with buying opportunities. So much better then when we have multiple overreactions to multiple crises (real or imagined). I just don’t see this as a time to panic — I see it as a time to buy great FTSE companies at bargain basement prices.

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Alan Oscroft owns shares in Aviva. The Motley Fool UK has recommended ARM Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.