2018 has proved to be nothing short of a nightmare for the FTSE 100. So far, Britain’s blue-chip index has shed 11% of its value this year and it was recently trading around the 6,850-point mark.
A similar percentage dip would see it fall to around 6,000 points (or 6,097 to be exact). And there are a number of factors that could drive the Footsie down to such levels.
Trade tensions
The Footsie’s producers of industrial metals like Rio Tinto — the index’s largest single mining company with a market-cap of 2.3%, according to FTSE Russell — have been under increasing danger as we’ve moved through 2018 because of rising trade tensions between the US and China.
Relations between Presidents Trump and Xi can already be described as stretched, and the arrest and planned extradition to the US of Huawei chief financial officer, amid accusations of sanctions violations relating to Iran, has hardly helped the situation.
Should relations fail to improve, and further tariffs be slapped on US and Chinese goods, then we can expect the share value of Rio Tinto, along with that of copper giant Antofagasta and diversified diggers BHP Group, Anglo American and Glencore, to keep sinking. Together, these firms account for between 7% and 8% of the FTSE 100’s market-cap, spelling immense danger for the index as a whole.
A weakening oil price
Those fears over the future trade environment also threaten to push crude prices further to the downside in 2019, spelling big trouble for FTSE 100-quoted BP and Royal Dutch Shell.
According to FTSE Russell, between them the two oil goliaths account for around 17-18% of the index’s complete market capitalisation. Clearly, if either of one of these businesses sneezes, the rest of the index catches a cold.
Those warnings of an oil market in rising danger of chronic oversupply are nothing new. But the threat of fresh trade wars on weakening, already-fragile global growth forecasts have put them up a notch or two. And latest Energy Information Administration forecasts, predicting further increases in US production and record shale output of 7.94m barrels per day in December, suggests that the world will be swimming in increasing amounts of oil regardless of OPEC and Russia’s latest supply cap.
Tobacco in turmoil
British American Tobacco is fourth on the FTSE 100 weightings scale, according to FTSE Russell, taking up around 4.2% of the bourse’s market-cap. Throw Imperial Brands into the mix too, and tobacco accounts for between 5% and 6% of the index’s total value. This spells trouble for 2019.
I used to own shares in Imperial Brands but sold out as global legislators intensified their fight against Big Tobacco’s traditional, revenues-driving combustible products. Unfortunately though, lawmakers are increasingly pushing to have the same restrictive rules concerning usage, sales and advertising placed on e-cigarettes as well.
The hostility towards these next-gen products isn’t going to go away any time soon. But arguably, a bigger problem for the tobacco titans next year will be a ratcheting up of plans in the US to ban menthol cigarettes. I wouldn’t be surprised to see the firms continue to slide in the months ahead.