What’s going on with the investment markets at the moment?
The FTSE 100 index of leading UK company shares was on the slide again today, closing down 71.52 points or 2.83% lower at 6,321.16.
This was the biggest one-day drop in the value of UK companies in 16 months, so represents a fairly major event in investment markets.
The index is now at its lowest level since mid-2013. It has fallen by nearly 10% since 4th September when it stood at a more impressive 6,878 points.
Shares around the world have fallen in value as a result of concerns about weak economic growth.
This is also being reflected in a fall in the price of oil; Brent crude slipped below $85 a barrel today and US light crude has dropped below $81 a barrel. The price of Brent crude has fallen by 20% since the summer and these lower prices are already being reflected in prices at the petrol pump.
Economic weakness in China and Germany in particular is weighing heavily on the mind of investors.
In addition to economic concerns, there are also issues worrying investor in specific sectors.
Travel and transport companies have been hit by fears over the potential impact of the Ebola virus. If the virus became establised outside of Guinea, Sierra Leone and Libera, world travel would quickly become curtailed and the share price of airlines or other transport companies would naturally plummet.
Geopolitical tension is also hurting investor confidence.
Protests in Hong Kong, tensions in Ukraine, the rise of the Islamic State in Syria and Iraq – investors have a lot to be nervous about right now.
Of course it’s not all bad news.
A fall in the value of the FTSE 100 means the yield from these companies has risen, to around 4%. This comfortably exceeds the yield available from cash or fixed income securities, which could appeal to income investors.
It has also resulted in a more attractive price-to-earnings ratio, with the FTSE 100 now trading on a p/e ratio of 12.5 compared to a historical average of closer to 14. Suddenly the market is not looking so expensive for long-term investors.
Our clients all have well diversified portfolios which will not fully reflect this close to 10% fall in the value of the FTSE 100. Diverse portfolios combined with long-term Financial Plans mean investors who have taken advice can avoid making knee-jerk decisions about their investments.
As one of my colleagues remarked this afternoon; “I love it when the investment markets hold an end of season sale”.
Other asset classes have had a better time of it over the past three months.
The average return for the IMA UK Gilts sector is 5.12%. It is 0.06% for IMA Property (although much better for UK commercial property, as this sector contains a lot of global property company shares) and 3.2% for the IMA Sterling Corporate Bond sector.
Global Bonds have returned an average of 2.68% over the past three months, and the IMA Asia ex Japan Equity sector is up by an average of 1.44%, demonstrating that it’s not all bad news for equities right now.
What we always encourage investors to do at times like this is tune out the sensationalist headlines, focus on the long-term plan and remember the value of diversification.
That said, if you have any concerns whatsoever, your Financial Planner at Informed Choice is only a phone call or an email away. Call us if you want to chat.
