UK market continues to face challenges

UK market continues to face challenges

The FTSE 100 dropped to a three-year low in February, sparking concerns over the stability of the UK market. Shares dropped to 5,632 on 9 February, slumping even further than the three-year low set in January this year at the start of the bear market.

At the time of press, the FTSE 100 (see Chart 1) was up for the third straight session, something that had not previously been seen year-to-date. The FTSE 350 Banking index was also down 3.6 per cent, its lowest level since November 2011. Hargreaves Lansdown was among the top fallers following a mixed earnings update.

Meanwhile, UK inflation also reached its highest level in 12 months in January, according to the Office of National Statistics (ONS).

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It has risen 0.3 per cent year-on-year, still a way off the Bank of England’s 2 per cent target.

Elsewhere in the world, concerns over the Chinese economy and the crash in commodity prices continue to impact markets around the world. Additionally, monetary policy tightening from the US Federal Reserve is also a matter of worry.

This year started with a highly volatile Chinese equity market and a forecast of a slowdown in the emerging economies. Commodities meanwhile have seen a different story. There were gains in oil shares after signs that oil producers were cooperating over supply. This pushed the FTSE 100 up by 0.6 per cent. The index is down by 12.12 per cent as at time of press and it is still 4 per cent lower than it was at the start of the year despite a rebound.

The road to stability in commodity prices still seems long. While countries such as India and Indonesia continue to remain steady, Russia and Brazil are bearing the brunt of the fall in oil prices.

“I think a lot of what is going on here can be traced back to the commodity crash that is dragging inflation and inflation expectations down so low that the central banks have to react to it,” said David Stubbs, global macro strategist at JP Morgan. “It is damaging equity earnings and so is adding sentiment to risk assets. It is hurting investment in general, which makes a lot of economic indicators appear worse in the short term.”

Market analysts and economists have predicted that the current difficulties in the market are not going to end until commodity markets stabilise. While no one knows when that would be, Mr Stubbs believes we will be lucky if it happens this year.“If we are not, it will be next year, and if it is next year, then this year is going to be quite difficult,” he said.

The UK economy is also challenged by the commodity market. Although the UK continues to grow at a steady pace, it still faces risk due to its heavy commodity and mining exposure. However, the UK could play a diversification role in a global portfolio. “It is also a key income source. The UK economy is one of the better performing ones, so it is possible to tug at that exposure inside of a UK equity portfolio, but you have to be very targeted and selective,” Mr Stubbs said.