What’s been dragging the FTSE 100 down?

On the surface, the FTSE 100 appears stable. The index started the year at 7,542p, and is currently sitting slightly down at 7,433p, as of 17 February’s close. But these numbers do not tell the full story of what a volatile period it has been for the blue-chip index, which in January alone soared to 7,674p before plunging 5.1% back down to 7,286p.

This follows a somewhat sluggish 2019 for the index, in which the FTSE 100 rose from a two-year low at the end of 2018 to gain 12.1% overall, compared to the 30% gains reported by the S&P 500.

Beyond the FTSE 100’s performance, the past two months have indeed been tumultuous, following a seemingly never-ending stream of social and political stirs – some bad, others not so much. How have these events played into the FTSE’s dramatic journey and, more importantly, how might they affect the index’s outlook?

  

The good and the bad

As UK Prime Minister Boris Johnson outlined his hard-line stance on the upcoming trade negotiations with the EU, a weakening pound worked in the FTSE 100’s favour as many of its overseas constituents banked their profits in dollars. Furthermore, China cutting import tariffs on US goods — a sign that the trade war between the two countries was easing — was also beneficial to sentiment.

According to a Kalkine Media report, 36 of the FTSE 100 constituents traded positively in January. Buoyed by the hopes of a UK economic upturn post-Brexit, BAE Systems’ [BA] share price rose by 11% while housebuilders Persimmon [PSN] and Taylor Wimpey [TW] rose 12.5% and 10.5% respectively.

It’s not all been good news, though. So far in February, BT’s [BT-A] share price has dipped 4.4%, partly in response to the loss of productivity resulting from Storm Ciara’s rampage. Carnival Plc [CCL], meanwhile, has lost roughly 3.7% in value since 12 December 2019. The company, which operates in the travel industry, has been impacted by general fears around travelling in the wake of the coronavirus epidemic.

Indeed, the coronavirus has had a wide-ranging impact on the markets. Rumours of a flu strain similar to the SARS outbreak in 2003 began to circulate after Christmas, with a first death announced on 11 January. After hitting a 6 month high on 17 January, the FTSE 100 began to slide, slipping 2% before a brief rally on the 24 January. As the crisis deepened the following week, the index slid a further 4% to a low of 7,286p.

  

Reaching 8,000p

The FTSE 100 has ebbed and flowed on the coronavirus newsflow, trading down on fears that the virus is proving harder to control and then rising on hopes of a potential vaccine.

Before these events, many commentators predicted a positive year for the FTSE 100, with AJ Bell stating that an 8,000p level could be achievable.

Russ Mould, an investment director at the advice firm, says there is currently too much confusion to make concrete predictions. “Until there are signs the virus has been contained equities look set to be dogged by uncertainty,” he said.

Jonathan Smith, writing in the Motley Fool, said the best action was not to panic but to focus on near term opportunities and long-term FTSE 100 growth.

“Should we see a UK interest rate cut then it’s likely there will be a move higher on the part of the FTSE 100,” he said. “When looking at sensitive events such as the coronavirus, it’s impossible to predict how it’s going to pan out. I’m focused on where the market will be in five or 10 years from now.”

“When looking at sensitive events such as the coronavirus, it’s impossible to predict how it’s going to pan out. I’m focused on where the market will be in five or 10 years from now” - Jonathan Smith

 

Neil Wilson, chief market analyst at Markets.com, however, finds it remarkable that the FTSE 100 is still not far off its record high of 7,877.45. “It does not seem entirely rational for US and European equities to be hitting record highs in the middle of potentially one of the most damaging economic events ever since the crisis,” he said.

 

Safety in numbers

For those investors concerned about the near-term, some security could be found in defensive stocks in the FTSE 100. Goldminer Polymetal [POLY] has benefitted from increasing precious metal prices in recent years, and the share price is currently up 7.2% year-to-date. As geopolitical uncertainty continues, it could benefit from investors stowing away their money in assets such as gold.

However, stocks with consumer exposure to China such as Diageo [DGE] and Burberry [BRBY], have already warned that the virus is hitting demand for its products. In the year-to-date, both firms are down 2.2% and 11.5%, respectively. Travel stocks too, such as the aforementioned Carnival and IAG [IAG] could see further impact in the near-term.

The FTSE 100 rang in the New Year with much optimism. Some investors may still be hopeful – but as the coronavirus epidemic grows, all bets are off both for it, and the global economy at large.