Could the FTSE 100 plunge to 3,000?

The FTSE 100 has plunged in value over the past two months, but there could be further declines on the cards as COVID-19 spreads around the world.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The FTSE 100 has recorded some of its most significant daily drops on record in the past few weeks. These declines have wiped out more than five years of gains for the index in a little less than a month.

The big question is, will the index keep falling or should investors starting buying after recent declines?

Time to buy the FTSE 100?

It’s almost impossible to predict what the future holds for stock markets around the world. Investors have been selling stocks at one of the fastest rates on record this month, due to concerns about the impact the coronavirus outbreak will have on the global economy.

The outbreak has crippled demand for goods and services. Many companies have reacted by cutting jobs. The airline industry, in particular, has already slashed thousands of positions.

Depending on how long the outbreak lasts, there could be further job cuts to come. This will have a knock-on impact on the global economy.

Outcome unknown 

As of yet, it remains to be seen how badly impacted the economy will be, but it’s unlikely countries such as Italy, Spain, South Korea and the United States will escape unscathed, considering what we know so far.

This is terrible news for the FTSE 100. As more than 70% of its profits come from outside the UK, this is a global stock index. Therefore, if the global economy slows, it will impact the earnings of FTSE 100 constituents.

So far, we’re only around a month into the outbreak. If it lasts for several more months, that could wipe out half a year of earnings for FTSE 100 companies. A 50% decline in earnings suggests the index could fall as much as 50% from pre-outbreak levels. That implies a drop to around 3,000 to 3,500.

That said, most of the index’s constituents are well-placed to weather the storm. As these are some of the world’s largest companies in their sectors, they’re well-funded and well-run. The outbreak might have an impact on their operations, but they’ve the financial flexibility and management skills to be able to navigate to the turbulence successfully.

Well-prepared

Many of these companies have been through similar situations in the past. Despite suffering significant disruptions to their operations, most FTSE 100 companies managed to pull through the financial crisis. Some required government bailouts, but they didn’t disappear entirely.

The best way to play this theme could be to buy a low-cost FTSE 100 tracker fund. A fund would allow you to take advantage of the market’s recent declines without trying to pick stocks.

As we don’t know how bad the outbreak was ultimately become, picking stocks to play the recovery could be a risky strategy. However, buying the whole market could limit your risk while maximising upside potential.

As the FTSE 100 currently supports a dividend yield of around 4.9% as well, investors will be paid to wait for the storm to pass and the index to recover.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »