Will the FTSE 100 crash?

The FTSE 100 has fallen after several shocks in the banking sector weighed on the broader market. Investors’ attention has been drawn to unrealized bond losses and worries about other financial sectors.

So, is this the beginning or something big, or is this just a storm in a teacup?

What’s up?

FTSE 100 shares in the financial sector, but banks in general, have fallen. Silicon Valley Bank panicked investors after the market realized in billions of unrealized bond losses, due to rising interest rates.

Markets are increasingly worried about bonds held by other banks. However, the industry has dismissed these concerns, saying that Silicon Valley Bank is unique in the technology sector. But fears were compounded by the implosion of Credit Suisse, which was later taken over by UBS.

British financial stocks fell sharply. For example, HSBC, which bought SVB’s UK operation for £1, was among the worst – it fell 18% in a month – although the acquisition was only a small addition to a large, well-capitalized and well-regulated bank.

So will there be an accident?

Maybe there will be a crash in the future, but this new challenge to the financial system is unlikely to lead to one I feel, at least in the UK.

For one, UK stocks don’t trade at very high multiples. There is really not that much room to show prices to fall, in my opinion. For example, Lloyds currently trades at a price-to-earnings (P/E) ratio of just 6.3. Which is cheaper and cheaper than its US counterpart.

This is largely the case in the banking sector, although more growth-oriented banks, such as HSBC, trade at just 8.8 times earnings. Earnings remained largely positive in Q4 for the sector as a whole.

US stocks face challenges

However, US stocks typically trade at higher valuations than UK stocks. The FTSE 100 average P/E is around 12, while the S&P 500 is 18. It is not a perfect comparison, but there are certainly concerns that US stocks are more to fall.

The legendary British investor Jeremy Grantham – co-founder of GMO, an investment management company founded in 1977 – has proposed that S&P 500 it will decrease by 16.7% during 2023. Considering that the index was pushed up at the beginning of the year, there may be a sharp decline. This SVB failure could be the start of a correction.

However, there is an upside. It seems that the Federal Reserve will raise interest rates more slowly after the SVB sent shockwaves through the banking and technology sectors. Higher rates mean less economic activity and less inflation.

But if rates go too high, the current tailwind could turn into a headwind. Higher rates can lead to damages, higher impairment charges for bad loans, and unrealized bond losses.

I stay away from the US market, and focus on the UK, especially with the index down 8% over the month.