How Will The FTSE Index Be Affected By A Double Dip Recession?
Statistics tell us that stockmarkets usually fall by 40% or more during recessions. So does that automatically mean that the FTSE 100 Index will fall by 40% if the UK economy falls back into a double-dip recession as the twin effects of austerity measures and high commodity prices start to hurt the average UK consumer?
The 10 biggest FTSE 100 companies are BAT, BG Group, BHP Billiton, BP, GlaxoSmithKline, HSBC, Rio Tinto Group, Royal Dutch Shell, Unilever and Vodafone. Together these 10 companies account for nearly half the value of the index and all of them are multi-national companies with operations spanning the globe. A recession which is confined to the UK economy will not hurt these companies very much (and by extension not cause too severe a decline in the value of the FTSE 100 Index).
However a global recession (such as the one we saw in 2007-2009) will have a large impact on the profits of multi-nationals and it is this type of global recession which would cause the FTSE Index to fall by roughly 40%.
Other companies, lower down the order in the index of FTSE 100 share prices , would however be affected to a greater degree by a UK-specific recession. Companies such as British Telecom, ITV, food and general retailers, banks and property companies all conduct most of their business in the UK and their profits would decline during such a recession.
So a strategy of simply shorting FTSE futures would not necessarily prove to be the most efficient way to protect a portfolio if you are worried about the UK falling into a double-dip recession. A better strategy would be to methodically go through your portfolio and cut your exposure to companies whose profits would be significantly affected by a double-dip recession.
For further financial information on FTSE 100 companies please follow the links.
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