What to make of FTSE turmoil in the run up to EU referendum
Shares, seen as riskier than cash because of their volatility, have proven this belief with some aplomb over the last five days, skittering in most unpredictable fashion due, no doubt, to next Thursday’s EU referendum – perhaps you’ve heard about this?
The UK’s blue-chip stock index, the FTSE 100, has spent the last five days in a torrid state, finishing on Tuesday at 5,923.5, 2% lower than its open and below 6,000 - a level not seen since February.
However, on Wednesday, the FTSE 100 climbed upwards on positive jobs data and rising mining shares.
The first conclusion to all this is that the stock market over the short term can be no better than a roulette wheel. But there is some reason behind this chaos, and what’s more, you could use it to your advantage as long as you don’t let your emotions get the better of you.
On the subject of this volatility, Mark Dampier, research director at Hargreaves Lansdown, says: “The stench of Brexit is stalking the streets of the City…. Given the opinion polls, the dramatic change seen in the betting odds and low sentiment in general towards world stock markets it seems quite possible we could see further falls as an increasing probability of Brexit is being priced in… this fall could well represent a great long-term buying opportunity.”
That last bit is important. Long ago, JFK said: “In the Chinese language, the word ‘crisis’ is composed of two characters, one representing danger and the other, opportunity.” It turns out that he was wrong, but the sentiment was admirable.
A lot of investors are worried about the UK leaving the EU because it invites uncertainty, which always worries the markets. However, investors will also have shopping lists ready if it does happen, because even conservative city types are throwing around numbers like ‘10%’ when discussing how far the FTSE could fall – in other words, there could be bargains galore.
To add to the tension, because the FTSE 100 is so global, heavily leaning towards international banking and mining companies, this potential fall could actually be short-lived as investors who pulled out in a panic realise that the prophecies of doom being touted by some were perhaps a little disingenuous and buy in again.
In fact, Adrian Lowcock, head of investing at AXA wealth, says in relation to the hugely popular CF Woodford Equity fund: “So whilst short term the fund would be hit by an inevitable sell-off in equities, the effects are not likely to last as long. Over the longer term these companies [ones listed on the FTSE 100 but with high US earnings] would benefit from a weaker sterling as it would give their overseas earnings a boost.”
With some much-needed sobriety and sense of perspective, he also says: “It is important to remember that the future is always uncertain. Economies adapt, people adjust and countries survive change. If it isn’t Brexit then the markets would find something else to worry about. When everyone else is losing their heads you should keep yours focused on your goals, the reasons you invested in the first place and look for investment opportunities which the volatility should create.”
All of this uncertainty points to the fact that you shouldn’t try to time the market, rather only invest in funds or companies that you trust to perform well in the long term. But if you were eyeing up an investment anyway and its price does fall… well, that’s an opportunity that would be hard to resist taking.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).