It is a well-known fact that the stock markets are cyclical in nature. What goes up can (and will) come back down. This is one of the fundamental principles of trading, as investors often seek to purchase assets after a clearly bearish cycle. However, these very same movements tend to worry some financial professionals. Downward trends can in some instances signal more profound economic challenges.
One recent development involves the observation that the UK may be headed for a recession in the not-so-distant future. Why are a growing number of analysts taking this somewhat dismal perspective? Do any economic indicators back up this observation? Are there any ways in which traders and individuals can offset gloomy market conditions? Each of these questions warrants closer attention to appreciate the wider financial landscape in the UK and what this means for traders.
What Have the Experts Said?
It is first important to put the current economic climate into perspective. Some will argue that the UK placed itself in a rather strained fiscal position due to Brexit and its knock-on effects. However, this represents the tip of the proverbial iceberg. There are several other factors that come into play.
Ongoing COVID Effects
The recent pandemic negatively impacted the global economy as a whole. The UK was certainly not immune from these effects. Many businesses were obliged to curtail their short to medium-term operations. Some were forced to close their doors altogether. This obviously placed a significant amount of strain upon the domestic economy. These thoughts were reflected in a recent statement by Chief CBI Economist Rain Newton-Smith who was quoted as saying that COVID was one of the reasons why the UK is currently facing a “toxic” set of circumstances 1.
The War in Ukraine
Regional conflicts have historically been damaging to economies, even if they happen to be located relatively far away from the zone in question. This is even more relevant in terms of the ongoing war in Ukraine, as many exports are derived from this nation. Thus, prices of certain goods (specifically those related to wheat) are on the rise. This places a further strain upon UK households that were already laden with budgetary concerns.
A Decline in Real Disposable Income
Another worrying sign comes in the form of data related to real disposable household income. The CBI predicts that these figures are predicted to contract by a worrying 2.2% – the largest decline since records began in the 1950s 1. The issue here is that tighter spending habits will likely have a negative effect in relation to the production of goods and services. This could force businesses to curtail their operations even further.
The Surprising Role of the Healthcare Sector
If every cloud has a silver lining, the healthcare sector is worth mentioning. The test-and-trace programs implemented by the government as the result of COVID actually provided this sector with a much-needed boost. However, the threat of another uptick in cases is no longer seen as realistic. This resulted in less funding being allocated to health-related firms. This is also one of the reasons why the UK economy contracted by 0.3% in April 2.
Fuel and Energy Woes
A final variable involves the rising prices associated with fuel and energy. These will impact households and in particular, the manufacturing sector. As goods become more expensive to produce, these costs will inevitably be passed onto the consumer. Once again, such movements could cause many individuals to significantly curtail their spending habits.
All Doom and Gloom?
The observations outlined above paint a rather stark financial picture. However, it needs to be mentioned that nothing is yet set in stone. Even an economic contraction of 0.3% does not necessarily signify that the UK is destined for a recession. Perhaps the more appropriate term would be medium-term stagnation. Regardless of what the future may have in store, there are many ways in which individuals can try to offset a bearish economic climate – one of them being online trading.
Let’s now take a closer look at this marketplace in greater detail as well as some of the potential benefits that it has to offer along with the risks.
What is the FTSE 100?
The FTSE 100 (UK 100m the derivative) is an index which tracks the top 100 companies within the UK. For this reason, it represents a viable indicator of the condition of the domestic economy.
The assets found within the main UK index are comprised of blue-chip companies. These firms are considered to represent the benchmarks of several industries including oil, natural gas, pharmaceuticals, and technology. One of the benefits of trading on this index is the fact that the associated movements are not as volatile when compared to small-cap firms and similar short-term asset classes.
So, what time does trading open and close? Normal trading hours begin at 8 am in the morning. All activities cease at 4:30 in the afternoon. Note that the market is open from Monday to Friday (not including official bank holidays). This is important to appreciate, as knowing these hours can help traders keep track of any late-breaking news.
What are Some of the Stocks Listed on the FTSE 100?
As mentioned previously the FTSE 100 can be considered a financial “barometer” to the condition of the overall UK economy. This is also why it contains some of the most well-known companies in existence. Here is a list of top companies by market capitalisation (at the time that this article was written):
- HSBC Holdings
- Unilever Group
Once again, it is clear to see that these firms are associated with a wide range of industries. Thus, they are often used to track where the domestic economy may be headed.
The Advantages of Spread Betting on the UK 100 Index
Traders can either trade CFDs or spread bet on the stock market in the UK, the latter being a popular choice because the profits are tax-free. (Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.) Another advantage is the fact that individuals can employ leveraged trades. This is another way of stating that only a small percentage of the full trade value is required to open a position. Investors can therefore enjoy greater levels of exposure without allocating an inordinate amount of capital. Of course, such an approach is also assuming that an equal amount of money can be easily lost.
And, knowing how to get started with spread betting is crucial to avoid mistakes along the way. It is also imperative to mention that even experienced traders will incur losses on occasion. The main intention is not to guarantee a profit, but rather to mitigate perceived levels of risk.
Keeping a Close Eye on the Future
Assuming the observations previously mentioned regarding the UK economy come to pass, it is likely that we will witness the FTSE 100 enters bearish territory. In such a scenario, a recession is certainly not out of the question. The primary issue, therefore, involves how long such a climate will last and what impact it will have upon the average household.
Analysts will, therefore, be watching the state of financial affairs with a good deal of scrutiny in the coming weeks and months. While it might not be possible to avoid a recession, there are still many ways in which businesses and individuals can take advantage of the investing options at their disposal.
Of course, only time will tell what is in store for the economy of the UK and for the world as a whole. The good news is that we now live within a highly interconnected society. It has never been easier to keep track of the latest financial news and when necessary, to make informed decisions at the appropriate times.
1 : Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
2 : Marketing for CFDs and spread betting is not intended for US citizens as prohibited under US regulation.