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 UKs leading index looks as if its on its way back down to 5,500 and further declines could follow.
Digging deeper
Its 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 asAnglo American,GlencoreandBHP Billitonlosing 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.
Whats more, the FTSE 100 is amarket-capweighted index. This means that the indexs largest constituents HSBC,Royal Dutch ShellandBP makemore of a difference to the indexs 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 Americans market cap topped 17bn, the company accounted for 1% of the FTSE 100s total market cap. Now, the company is one of the indexs 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 indexs performance is now determined by a smaller group of companies.
British American TobaccoandImperial Tobacconow make up 7% of the index while HSBC,LloydsandBarclaysmake up more than 12%.
It could be argued that British American and Imperials businesses are in terminal decline, as governments around the world try to stamp out smoking. And the prospects for HSBC, Lloyds and Barclays arent 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, its not unreasonable to suggest that the UKs leading index could fall further even after recent declines.
Hard to predict
Still, in reality its difficult to try and predict what the future holds for the FTSE 100. Even some of the worlds 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.
Thats 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.
If it’s income you’re after, there are plenty of opportunities out there.
One such opportunity is revealed in the Motley Fool’s new income report. The report, titledA Top Income Share From The Motley Fool,gives a full rundown of the company our analysts believe is one of the market’s dividend champions.
This is essential readingfor income investors.
The report is completely free and will be delivered straight to your inbox.Click here to downloadthe free report today!
Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings and Barclays. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.