It looks as if the FTSE 100 has already peaked. After hitting a 10-year high of 7,070 at the beginning of this year, the index has slumped, falling as much as 15% from its peak.
Unfortunately, it looks as if this is just the beginning. The UK’s leading index looks as if it’s on its way back down to 5,500 and further declines could follow.
Digging deeper
It’s easy to tell which sector has been dragging the FTSE 100 down during 2015. Indeed, the resource sector has had a terrible year with some of its largest constituents, such as Anglo American, Glencore and BHP Billiton losing as much as much as 70% of their market value. Anglo American, for example, had a market cap of around £17bn at the beginning of the year. Now the company is worth £4.3bn – a loss of value of £12.7bn.
What’s more, the FTSE 100 is a market-cap weighted index. This means that the index’s largest constituents – HSBC, Royal Dutch Shell and BP – make more of a difference to the index’s performance than smaller peers.
But the index has undergone a huge transformation this year as former giants such as Anglo American, Glencore and BHP, which started the year making up a large percentage of the index, have become less influential. As a rough guide, at the beginning of 2015 when Anglo American’s market cap topped £17bn, the company accounted for 1% of the FTSE 100’s total market cap. Now, the company is one of the index’s smallest constituents, accounting for less than 0.3% of the FTSE 100.
Narrowing field
What does this mean for investors? Well, for a start it means that the FTSE 100 is no longer heavily weighted towards the performance of miners. At the beginning of the year miners made up 15% of the index but now only account for less than 4%.
However, it also means that the index’s performance is now determined by a smaller group of companies.
British American Tobacco and Imperial Tobacco now make up 7% of the index while HSBC, Lloyds and Barclays make up more than 12%.
It could be argued that British American and Imperial’s businesses are in terminal decline, as governments around the world try to stamp out smoking. And the prospects for HSBC, Lloyds and Barclays aren’t that much more attractive. These three banks are all struggling to grow in an increasingly competitive market.
So the outlook for these five companies, which make up a fifth of the FTSE 100, is depressing. And as these companies make up a large part of the FTSE 100, their performance will be reflected in the index.
Simply put, it’s not unreasonable to suggest that the UK’s leading index could fall further even after recent declines.
Hard to predict
Still, in reality it’s difficult to try and predict what the future holds for the FTSE 100. Even some of the world’s most prominent investors fail to correctly identify market trends and more often than not, trying to time market movements can end up costing you a lot of money.
That’s why the most successful investors focus on the long-term performance of equities. They build a portfolio of stocks that have reliable long-term outlooks, illustrious histories, dependable dividends and hold for the long term.
