Forget Greece: Here’s The Real Reason For The FTSE 100 Slump!

G A Chester averts his eyes from the mesmerising Greek drama to look at FTSE 100 (INDEXFTSE:UKX) fundamentals.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The world watches as the crisis in Greece reaches ever new heights of tension. It’s mesmerising theatre, and commentators link daily moves in the FTSE 100 to each new development in the Greek drama. Last Friday, the UK’s top index closed 6.3% down from its all-time high achieved in the spring, having flirted with a double-digit drop earlier in the week.

Greece is certainly dominating the news, and creating volatility in financial markets, but is it diverting us from a more fundamental factor that has also coincided with the FTSE 100 slump?

Nobody’s talking about the downgrades in corporate earnings forecasts that have unfolded this year. When I look at how severe these have been, I’m a little surprised the Footsie isn’t lower than its current 6,673 points. The index certainly has potential to slump further, particularly if earnings estimates continue their downward trend.

Should you invest £1,000 in Cab Payments right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Cab Payments made the list?

See the 6 stocks

The top 10 companies of the FTSE 100 account for over 40% of the index’s weight. The table below shows the percentage change — from six months ago to today — in consensus earnings forecasts for the current year and next year.

Company Current year (%) Next year (%)
Shell -33.1 -23.2
HSBC -9.6 -13.1
BP (LSE: BP) -30.6 -28.2
GlaxoSmithKline -13.4 -9.2
British American Tobacco -4.8 -5.0
Vodafone (LSE: VOD) -15.2 -19.5
Lloyds -0.1 -1.1
SABMiller -9.2 -10.9
AstraZeneca (LSE: AZN) +8.7 +9.9
Diageo no data -5.9
Weighted average -14.2 -12.5

Source: calculations based on data from Digital Look

As you can see, only one of the companies — AstraZeneca — has seen the City consensus on its earnings prospects rise over the past six months. There are some pretty hefty downward revisions among the other nine. Downgrades outweigh upgrades further down the index, too. The weighted averages in the bottom row of the table might suggest a healthy 10%-15% market correction for the FTSE 100 is in order.

Winners and losers

It’s no surprise that analysts have got through barrels of red ink in marking down forecasts for Shell and BP in the face of weak oil prices. Shell’s shares have fallen 14.4% over the past six months, but earnings forecasts for the company have fallen much further. Meanwhile, BP’s shares have actually risen by 7.1% over the period. Sure, there has been some good news and reduced uncertainty on outstanding issues relating to BP’s Gulf of Mexico oil spill, but the earnings downgrades and rise in share price have combined to crank up the price-to-earnings (P/E) ratio from 10.9 to 16.3. BP’s valuation doesn’t look appealing to me at this level, and I think the shares could be vulnerable in a market correction.

Other sectors haven’t been downgraded as massively as the oil industry. But revisions to earnings forecasts for Vodafone have certainly been substantial. Furthermore, as with BP, as earnings prospects have been downgraded, Vodafone’s shares have actually risen — by 4.8%. The P/E of the telecoms group has shot up from an already-high 34.9 six months ago to 42.2 today. With Vodafone having considerable exposure to Europe, you’d have thought the launch of eurozone “quantitative easing” in the spring to stimulate economic activity might have resulted in analysts upgrading their earnings forecasts for the company. But no, forecasts have been revised down, and Vodafone’s rating looks unjustifiably high to me.

By contrast, AstraZeneca is looking an increasingly interesting proposition. The company has been revitalised under chief executive Pascal Soriot. After several years in the doldrums, which saw analyst earnings forecasts repeatedly revised down, the corner seems to have been turned, and a trend of upgrades could be starting to appear. Despite this, Astra’s shares have weakened 6.6% over the past six months. I see Astra’s current P/E of 15.4 as attractive, because the potential for further upgrades gives the shares scope to rise, and, as the market looks forward to the company returning to earnings growth, it could also command a higher P/E.

But what does the head of The Motley Fool’s investing team think?

Should you invest £1,000 in Cab Payments right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Cab Payments made the list?

See the 6 stocks

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended shares in GSK and HSBC. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

Stock-market crash: the meltdown of the Magnificent 7

Just before Christmas, these Magnificent Seven stocks were riding high. But after the worst quarter for US stocks since autumn…

Read more »

Investing Articles

Wow! IAG shares are undervalued by 47%, according to analysts

IAG shares have surged over the past 18 months, but analysts are pointing to more growth. Dr James Fox takes…

Read more »

Investing Articles

2 cheap FTSE 100 and FTSE 250 shares to consider for an ISA before 5 April!

These FTSE 100 and FTSE 250 shares are on sale today! Here's why long-term Stocks and Shares ISA investors should…

Read more »

Investing Articles

How I’m building a new second income for 2035

Millions of us invest for a second income. Here are the steps Dr James Fox is taking in order to…

Read more »

Investing Articles

At a 52-week low but forecast to rise 73%! Is this growth share the FTSE’s top recovery play? 

This FTSE 100 growth share has taken an absolute beating over the past two years but Harvey Jones says the…

Read more »

Investing Articles

This FTSE 250 share offers a juicy 9.8% yield. Will it last?

This well-known FTSE 250 share has a percentage dividend yield approaching double digits. Should Christopher Ruane add the income share…

Read more »

Investing Articles

Is a £333,000 portfolio enough to retire and live off passive income?

A third of a million pounds can generate a serious amount of passive income, but relying on this sum alone…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

Here’s why Nvidia stock fell 13% in March

The Nvidia stock price rise was looking unstoppable. Should investors now be wondering if the same might be true of…

Read more »