After rallying above 7,000 during the first half of this year, the FTSE 100 is now on the back foot. The index is down around 4.9% year-to-date excluding dividends. If you’re a fan of technical analysis, it looks as if the index has peaked, and is now on its way back down to 3,000.
However, here at The Motley Fool we like to view investments based on fundamentals and a long-term outlook, rather than short-term chart-based trading patterns.
Unfortunately, the fundamentals seem to agree with the technical picture.
Global growth
The FTSE 100 is a truly global stock index. More than 70% of the FTSE 100’s profits come from outside the UK, and the index is extremely sensitive to global shocks. What’s more, just over a fifth of the index derives its profits from the resource sector.
All in all, the FTSE 100 is extremely sensitive to global economic trends, and there are dark clouds gathering over the global economy.
Indeed, only last week the Organisation for Economic Co-operation and Development warned that said global trade had dropped to levels perilously close to those “associated with global recession”. Worldwide trade growth is forecast at 2% this year, down from 3.4% in 2014. Alongside this prediction, the OECD downgraded its forecasts for global growth, from 2.9%, down from 3% forecast in September.
Also, the International Monetary Fund has warned that a marked slowdown in big emerging market countries will cut global growth to its lowest level since 2009.
Slowing global trade and economic activity will be bad news for global banks, such as HSBC and Standard Chartered, which make up 8% of the index. Further, a slowdown in economic activity will hit the miners and oil companies, such as Shell, BP, BG, BHP, Rio, Anglo American and Glencore, which make up approximately 21% of the index.
Back in the domestic market, retailers Tesco, Sainsbury’s and Morrisons are all struggling to cope with the rise of the discounters. These three retailers make up 2% of the index.
These eleven companies, all of which are facing structural issues that are eating away at profits, make up 28% of the FTSE 100. But there’s also trouble brewing in other parts of the market.
Overvalued
The companies struggling with structural issues will drag the FTSE 100 lower. However, at the other end of the spectrum, the companies growing rapidly are all starting to look overvalued.
Take Unilever, Reckitt Beckiniser and SABMiller for example. These three companies account for 6% of the index but are now more expensive on a P/E basis than ever before. The same can be said for the utility, housing, REIT and construction sectors, which make up 7.2% of the index.
So, at one end of the market there are many companies that look overvalued based on historic figures. And at the other end, a fifth of the FTSE 100’s constituents are struggling with secular change.
Overall, the fundamentals seem to be indicating that there’s trouble ahead.
