The FTSE 100 index is down almost 22% so far this year as the pandemic ravages the world economy, plunging major stock indexes into a temporary bear market in February and March – although most of them have successfully climbed back from that hole.
This is, however, not the case for the FTSE 100 index, which remains on bear territory despite the UK’s strong stand as one of the world’s most lawful and reputed financial systems.
What seems to be strikingly out of synch is the fact that the index is resembling the performance of an index that is far from being a peer – the MSCI Russian Index – which tracks the performance of the largest stocks in that country, whose political and economic landscape is markedly different to that of the UK.
Is there a particular reason as to why the FTSE 100 index performance has been so disappointing this year? Is this a buying opportunity?
Let’s take a closer look at the variables that are driving the FTSE 100 index at the moment to identify if this is a buying opportunity, or if it is in fact just a sign of the times.
Sectorial distribution is weighing on the performance of the FTSE 100 index
One of the economic sectors that have drove US stock exchanges higher this year is technology, as stay-at-home policies have increased businesses’ reliance on IT systems to operate, while individuals have also turned to tech to entertain themselves by watching Netflix or by turning to social media for a distraction.
In fact, the largest tech corporations in the US – the so-called FAANG stocks – which include Amazon, Apple, Facebook, and Google, account for more than 20% of the S&P 500 and their positive performance this year has weighed positively on the index.
In contrast, the technology sector accounts for only 2% of the FTSE 100 index, with only three companies – Avast, Aveva Group, and Sage Group – comprising the index’s tech component.
The first two shares have seen gains this year, while the third one has posted a mild loss of 0.58% so far.
Meanwhile, the communications services sector, which accounts for roughly 5% of the index, is mostly in negative territory, with companies like WPP, Informa, and BT Group leading the drop accumulating more than 50% in losses this year.
The absence of growing tech companies is, therefore, one of the pieces of the puzzle to understand why the FTSE 100 index is down this year.
On the other hand, underperforming sectors like financials and energy are weighing heavily on the index, both of which account for 17% and 10% respectively – with companies like Royal Dutch Shell and BP leading the losing table dropping by more than 50% this year while the banks, once the crown jewel of the index, are also down more than 40% as is the case for Barclays, HSBC, and Lloyds.
Both of these segments have been heavily battered by the pandemic and their relevancy for both the index and for the country’s economy is casting a shadow of negative sentiment on the UK stock market as a whole, despite the fact that the country continues to be one of the strongest players in the global economic landscape.
A triad of risks looming on the backdrop of UK stocks
Three risk factors are also contributing to a drop in the UK’s top stock index. These are the potential of a messy Brexit, the prospect of a sharp economic recession, and a resurgence of the virus in the country – with the potential of a second wave of lockdowns.
Of those three factors, the first remains the only one that other domestic stock markets do not share, and given the consequences that a no-deal Brexit or a disorganized trade arrangement could have on the British economy, it is not a variable whose consequences should be underestimated – and market participants seem to know that.
What’s next for the FTSE 100 index?
The FTSE 100 index has apparently found a floor at the 5,800 level lately after a swift rebound off its March lows. This is providing some degree of stability to the index, although the risk of another sell-off resulting from a second wave of lockdowns is definitely on the picture.
That said, the index has been posting a set of subsequent lower highs, which means that market participants are reluctant to push the price higher.
As a result, the price action is forming what appears to be a descending triangle, a bearish pattern that could end up breaking the support as the price fails to move higher.
A few more bounces off the triangle’s upper and lower trend lines may be needed to confirm the pattern, but everything points to a bearish outlook for the index – especially if one considers the negative backdrop including the looming virus situation and the upcoming deadline for a trade deal with the European Union before exiting.