The FTSE 100 fell for six consecutive days to close yesterday at its lowest level in 2014 so far. The benchmark index dropped by almost 9 per cent and fell further in early morning trading today but closed at 6331 points.
It marks the second large fall for UK equities this year, following a rout through September and October when sentiment haemorrhaged due a host of worries including tense geo-politics and a spiralling death count from the Ebola virus.
Beginning in early September, the correction wiped almost 10 per cent off the value of the FTSE All Share with the large cap part of the index – the FTSE 100 – being the worst affected.
It’s not only UK stocks that have suffered. Since the start of December, major indices such as the S&P 500, Nikkei 225, Euro Stoxx and MSCI Emerging Markets have posted losses as investors moved away from risk assets.
The continuing plunge in the price of Brent crude to below $60 per barrel has left investors and fund managers worried although many anticipate a mixture of positive and negative effects.
Mike Deverell (pictured), investment manager at Equilibrium, says the fall of oil has brought back memories of 2008.
“The one thing that everyone has in the back of their mind is the potential disaster. If you think about the financial crisis with just a few people not being able to pay their mortgages in Detroit, not many people saw the knock-on effects,” he said.
“We have such an integrated financial system that you don’t know who has loads of leveraged oil exposure or who has leant money to Russia. That is the danger and why markets are down, but rationally a low oil price is good.”
Performance of indices in 2014
Source: FE Analytics
Brenda Kelly, chief market strategist at IG, says investors should expect further pain to come for UK equities as long as the oil price remains weak.
“Unless we see oil prices stabilising we can expect to see markets running for the hills in the near future,” she said.
“The fact that the oil price has not stabilised has been to detriment of all global indices but especially the FTSE 100 given its weighting to the oil and gas sector over the past six days of consecutive losses.”
“There is also definitely a spill over into other sectors: mining, for example, has come under attack. Sentiment is a problem as well because you don’t relax when you see the market fall for a substantial period of time. It is clearly affecting broader market sentiment.”
The linked fall of oil and UK equities brings back memories of the financial crisis but in contrast to that period most commentators attribute the cause of the current fall to a spike in supply rather than weakening demand.
Performance of indices over 8yrs
Source: FE Analytics
“It is a bit different to 2008. We are looking at a currency crisis and a supply glut in oil and a lot of it is down to the shale producers and the fact that the US is now self-sufficient, so they are not looking to import as much oil which is clearly affecting markets,” Kelly said.
She also says the downward pressure on inflation of a lower oil price raises worries about deflation, especially in the eurozone which lowers markets’ broader risk tolerance.
Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, says 2014 has been a year of “non-stop pain” for investors particularly due to the oil price and says the collapse in the Russian rouble is casting a deep shadow over markets.
“We think this phenomenon is attributable to the transition from a backdrop of maximum liquidity-minimal growth that persisted from 2009 to 2013 to one of higher growth and thus lower liquidity in 2014 and 2015,” he said.
“The ultimate expression of this was the demise of energy in the latter part of 2014 as investors fled from a sector that had attracted both capital and leverage in recent years on the back of its ‘scarce growth’ characteristic.”
“2014 ends with fear rather than greed, as the currency of Russia, the world's number one in nuclear weapons, number one in natural gas, number two in military personnel, number three in oil production and number nine in population, collapses.”
AFI panellist and discretionary fund manager Paul Warner (pictured), managing director of Minerva Fund Managers, is buying into the correction and has reduced his cash position from 11 per cent to 5 per cent in the past few days, spelling an end to his bearish phase.
Warner told FE Trustnet recently that he was the most bearish had ever been in the past 24 years but thought the market’s current decline would not continue and expects it to rise in 2015.
“I couldn’t understand why people were buying in October this year because I expected the market to fall further but since the FTSE was launched in 1984 it has risen in almost every two-week period at the end of each year and so I’m not betting against that,” he said.
“Also, while things look bad at the moment I expect next year will be better for equities and I think that the falling oil price is a very positive thing for economies overall as it will boost global spending.”
Deverell also used the fall as a buying opportunity.
“My initial instinct is that is temporary and we have actually just been adding to clients equity positions via a FTSE 100 tracker. We did that in October too, it is quite a sensible thing to do when markets dip,” he said.
“Clearly if you are BP or Shell – a big part of the FTSE 100 – a slide in your share price is perfectly rational but when you start looking a bit wider it is a really good for the US and UK, putting money in peoples’ pockets.”
