The FTSE 100 has recorded some of its most significant daily drops on record in the past few weeks. These declines have wiped out more than five years of gains for the index in a little less than a month.
The big question is, will the index keep falling or should investors starting buying after recent declines?
Time to buy the FTSE 100?
It’s almost impossible to predict what the future holds for stock markets around the world. Investors have been selling stocks at one of the fastest rates on record this month, due to concerns about the impact the coronavirus outbreak will have on the global economy.
The outbreak has crippled demand for goods and services. Many companies have reacted by cutting jobs. The airline industry, in particular, has already slashed thousands of positions.
Depending on how long the outbreak lasts, there could be further job cuts to come. This will have a knock-on impact on the global economy.
As of yet, it remains to be seen how badly impacted the economy will be, but it’s unlikely countries such as Italy, Spain, South Korea and the United States will escape unscathed, considering what we know so far.
This is terrible news for the FTSE 100. As more than 70% of its profits come from outside the UK, this is a global stock index. Therefore, if the global economy slows, it will impact the earnings of FTSE 100 constituents.
So far, we’re only around a month into the outbreak. If it lasts for several more months, that could wipe out half a year of earnings for FTSE 100 companies. A 50% decline in earnings suggests the index could fall as much as 50% from pre-outbreak levels. That implies a drop to around 3,000 to 3,500.
That said, most of the index’s constituents are well-placed to weather the storm. As these are some of the world’s largest companies in their sectors, they’re well-funded and well-run. The outbreak might have an impact on their operations, but they’ve the financial flexibility and management skills to be able to navigate to the turbulence successfully.
Many of these companies have been through similar situations in the past. Despite suffering significant disruptions to their operations, most FTSE 100 companies managed to pull through the financial crisis. Some required government bailouts, but they didn’t disappear entirely.
The best way to play this theme could be to buy a low-cost FTSE 100 tracker fund. A fund would allow you to take advantage of the market’s recent declines without trying to pick stocks.
As we don’t know how bad the outbreak was ultimately become, picking stocks to play the recovery could be a risky strategy. However, buying the whole market could limit your risk while maximising upside potential.
As the FTSE 100 currently supports a dividend yield of around 4.9% as well, investors will be paid to wait for the storm to pass and the index to recover.
The post Could the FTSE 100 plunge to 3,000? appeared first on The Motley Fool UK.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020