It closed at 6,446, the lowest closing level since 13 December 2013. The blue-chip index is now down 1.69 per cent year-to-date after being weighed down by geo-political tensions and disappointment over yesterday’s monetary policy meeting by the European Central Bank.
Year-to-date performance of FTSE 100
Source: FE Analytics
However, the FTSE recovered somewhat in early trading today and is now around 1 per cent higher than it was at close yesterday, sitting around the 6,505 mark at the time of writing.
As Hargreaves Lansdown’s Laith Khalaf (pictured) points out, this is still 5 per cent lower than the recent peak of 6,878 achieved at the beginning of September.
“Markets are prone to periodic corrections and we have actually sailed through a pretty smooth 18 months, so it should come as no surprise to encounter some choppiness. Investors should keep focused on the long term and try and ignore daily movements as much as possible,” Khalaf, a senior analyst at the Bristol-based firm, said.“The level of the UK stock market looks close to its historical average when you consider company profits. This means it is neither obviously expensive, nor particularly cheap. In this environment, investors choosing active funds might consider backing experienced and proven stock pickers, who derive returns not just from broad market movements but also from the fortunes of the particular companies they invest in.”
FE Alpha Manager Giles Hargreave thinks now is more a buying opportunity than a reason to be nervous given that valuations look more attractive and the outlook for the global economy remains unchanged.
“I like to think it’s just a correction. Not much has changed in the world,” he said.
“In Europe they need to do everything they can to get the economy going. QE in Europe will be good for equities and I think they’ll do that.”
The star smaller companies manager, who heads up the Marlborough Special Situations and five FE Crown-rated Marlborough UK Micro Cap Growth funds, says he’s optimistic about the outlook for UK companies.
“There’s better value to buy good companies. Stocks are cheaper than they were two weeks ago,” he said.
However, Hargreave says the economy is “patchy” so it’s important to look at fundamentals and select stocks that can perform well regardless of market conditions.
Colin Morton, manager of the Franklin UK Equity Income and Franklin UK Blue Chip funds, is also using the pullback as a buying opportunity.
He says yields on equities are particularly attractive relative to other investments like cash and bonds.
“I’m finding a lot of companies yielding 4 per cent or above. I’d much rather be in good quality companies,” he said.
“There are a wide range of companies out there offering yields which on the face of it compared to other instruments look very attractive.”
“If I can buy what I think are good, quality investments that to me doesn’t look like a bad place to be compared to other opportunities out there.”
Morton says he’s taken the sell-off in the last two weeks as an opportunity to top-up existing holdings in Rio Tinto, BHP Billiton, Unilever and National Grid, all of which have yields in the region of 4 to 5 per cent.
However, Morton does highlight a dark cloud in the form of Europe after yesterday’s ECB meeting failed to give investor’s confidence the central bank would be able to step in and do the liquidity measures required to kickstart the region’s economy.
“Europe in particular is very weak. We hoped that Europe would stabilise but it has continued to fall,” he said.
Geo-political noise seems to be the consensus among UK equity managers for yesterday’s pullback, with Liontrust’s Jan Luthman and Royal London’s Martin Cholwill citing issues like the tension in Russia and Ukraine, the growing threat of ISIS and protests in Hong Kong as catalysts alongside Europe.
However, each manager has a positive outlook for equities in spite of the macro risks.
Luthman, who runs the Liontrust Macro UK Growth and Liontrust Macro Equity Income funds, says the macro risks out there have been generally ignored by the markets, which gives him the confidence they can continue to be resilient in the face of negative macro news.
“In times past [the current macro events] would have sent markets a lot lower,” he said.
“It’s my personal surprise not that markets have fallen so far, it’s the fact they haven’t fallen farther.”
Since the macro news is already priced in, in Luthman’s opinion, he says it’s difficult to see what would send them spinning now.
“If markets have been resilient so far it’s difficult to see why they would lose that resilience,” he said.
He agrees with Morton’s view that the yields on equities make them more attractive than other asset classes and says he’s generally positive about the outlook for stocks.
However, Luthman thinks from a UK specific perspective that the general election next year could undermine investor confidence and create some volatility in the markets.
Cholwill, manager of the five FE Crown-rated Royal London UK Equity Income fund, echoes his view, saying there have been a lot of issues “niggling” markets but nothing that’s likely to cause it to hit a tailspin.
The manager says there are always geo-political events that cause investors to think the world is going to end, like the Scottish referendum, but the likelihood is so low that they rarely come to fruition.
“We get worried about Armageddon and yet again Armageddon is postponed,” he said.
The manager added that he had some money come into his fund yesterday and he used it to buy a number of stocks on lower valuations in the afternoon.
“I had some money come into my fund yesterday and I spent it yesterday afternoon because I thought it was a good opportunity,” he said.
However, Rathbone’s Carl Stick, manager of the Rathbone Income fund, is a little more wary about the short-term outlook.
He thinks there’s a lot of conflicting information in the markets that will lead to uncertainty and volatility in the coming months.
“Generally, markets are being buffeted by a lot of noise: inconclusive and ultimately disappointing comments from Mario Draghi, employment data out of the US, poor manufacturing numbers from the West and an inevitable focus on geo-political tensions,” he said.
“Market participants are having to evaluate contradictory sets of data, so it is unlikely that October will see an end to increased volatility, especially as the US readies to reduce its QE later in the month.”
