Global blues dragging down UK blue chips: Domestic strength has not been enough to buoy UK stocks

 
Chris Papadopoullos
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Slowdowns in China and the Eurozone have had a major impact on the FTSE 100, which is heavily exposed to global events
Any drop of 10 per cent or more in the stock market over a short space of time is known as a “correction”. The FTSE 100 is well into correction territory.

The index of the 100 biggest London-listed firms ended 2014 just above 6,500. It then surged past 7,000 to hit a peak of 7,104 in April, but has lost 13 per cent since.

Despite a year of decent UK growth, which is forecast by many to be the fastest in the G7 group of countries again this year, the FTSE 100 could be fortunate to end 2015 above its end-2014 figure, let alone its April peak.

The benchmark index will struggle to to finish above 6,000 this year, says Alastair Winter, chief economist at investment bank Daniel Stewart.

At the start of the year, he said, investors were waiting to see if higher business investment and earnings in the UK would be strong enough to offset slowdowns elsewhere in the world.

“I am more pessimistic than I was then, now that the global slowdown (including the US) is quite a bit worse than I first feared,” he told City A.M.

The markets team at Capital Economics, a consultancy, also believe the UK’s blue-chip index will struggle to reach its 2015 peak, predicting an end-of-year reading of 6,750.

“We doubt that the underperformance of the FTSE 100 reflects concerns about the health of the UK’s economic recovery,” said the firm’s senior UK economist Sam Tombs, who believes the decline is down to a strong pound and a slowdown in China.

The concerns were echoed by analysts at JPMorgan, who also see the FTSE 100 underperforming this year.

So why are stocks performing so badly at a time when the UK economy is putting in a decent performance?

It largely comes down to the fact that FTSE 100 firms are disproportionately exposed to global events.

Oil companies were the first to come under pressure after global crude prices plummeted. Prices in January were half what they were four months earlier.

Then there has been the strength of sterling. A strong pound can hurt exporters by making their goods more expensive in foreign markets. But it also reduces the value of revenue earned in places like the Eurozone. If a company earned €1m this week, it would exchange to £725,000 when brought back to the UK – compared with £800,000 this time last year. That has hit company earnings.

The strength of the pound is partly due to the euro’s weakness, which has been driven down by the Eurozone’s €1.1 trillion money-creation programme, known as quantitative easing, launched earlier this year.

Another factor has been falling growth in China, a major importer of commodities. Gold and copper prices both hit five-year lows last month, taking a toll on FTSE 100 miners.

While it may struggle to reach the heady heights of April, the FTSE 100 is likely to finish the year on the up, says Capital Economics’s Tombs.

“We think equity prices will find a floor soon and will start to recover,” he said. “The valuation of UK equities looks more attractive than for those in the US, and we think that some of the recent strength of the pound is likely to be reversed, as faster rises in interest rates in the US than markets currently expect support the dollar.”

JP Morgan sees “upside... after the recent correction.”

The FTSE bears may be in the ascendancy right now, but its bulls are expecting the tables to turn.

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