Last week wasnt a good one for the FTSE 100, losing 2.4% overall and dipping to a 52-week low of 5,499.5 on Thursday 11 February. Although its recovered a little since then, to 5,862 points, Londons top index is now down 15% over 12 months. Why?
Its usually fear and uncertainty that cause investors to flee shares, and thats coming from multiple directions. Cheap oil is scaring people, though I really dont know why oil explorers and producers dont like low prices, but its good news for most companies who are consumers of the stuff.
And oil at around $34 a barrel is hurting so many producing countries that its simply not sustainable for long its too early to tell whether the strengthening in recent days after rumours of some OPEC action will continue, but a year from now oil will surely not be this cheap.
The economy is fine
The receding likelihood of a UK interest rate rise is also worrying a lot of folk, as it suggests that company earnings growth wont be as high as hoped. And the slow speed of recovery in the eurozone only adds fuel to that particular fire. But again, I see overreaction.
Companies are only growing their earnings at a few percent per year, are paying dividends of 3% or so and keeping them rising ahead of inflation. I just dont understand why people think thats so bad. And the eurozone? Well, its sluggish for sure and I expect there will be crises ahead, but its recovering and its no reason to shun great UK shares. US economic figures arent yet as good as many had hoped but again, things seem to be ticking along just fine with a longer-term view.
Chinese slump
China is a more serious issue and its economic slowdown is surely going to be deeper and more prolonged than previously feared. But why should that mean a 5% dividend yield from National Grid isnt worth having? Or that we should turn our noses up at EPS growth forecasts of better than 40% from ARM Holdings?
Miners are hurting from the slump in commodities prices, made worse by slowing Chinese demand? Why not buy housebuilding and construction firms instead, while theyre enjoying cheap raw materials? Barratt Developments is on a forward P/E of only 10, with double-digit EPS growth and a 4.9% dividend yield forecast. And Kier Group is offering a 4.8% yield on a P/E of 12, with earnings growth also on the cards.
Banks and financials look very cheap too insurer Aviva is on a 2016 forecast P/E of just 8.5, with a 4.8% dividend predicted, and even the super conservative Prudential is on a P/E of only 9.6.
Buy when others are fearful
When markets overreact to crisis, they present rational long-term investors with buying opportunities. So much better then when we have multiple overreactions to multiple crises (real or imagined). I just dont see this as a time to panic I see it as a time to buy great FTSE companies at bargain basement prices.
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Alan Oscroft owns shares in Aviva. The Motley Fool UK has recommended ARM Holdings. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
