FTSE Falls: The Financial Times Stock Exchange takes a knock
January 30, 2021
3 min read
What's going on here?
The FTSE100 index fell by 14.3% during 2020; its biggest fall since the height of the financial crisis in 2008.
What does this mean?
The FTSE100 index, which tracks the UK’s 100 largest public companies according to their market capitalisation (calculated by multiplying a company’s current share price by the number of issued shares), fell by 14.3% over the course of 2020. The index started the year at 7542 points and had fallen to 4640 points by the end of the year. The uncertainty surrounding the Covid-19 pandemic and Brexit have been key factors behind its decline.
The FTSE 100 fell more than the stock markets of other countries, such as the US’s S&P 500 and tech-focused NASDAQ. This is primarily because the sectors that suffered the most severe blows due to Covid, including travel, banks and general retail, make up a large proportion of the FTSE100. For example, British Airways’ parent company, IAG’s share price fell by 61%. The index’s lack of tech stocks, which soared in price during the pandemic, also weakened its performance compared to its tech-heavy US counterparts.
What's the big picture effect?
It is critical to note that the FTSE 100 is likely to rebound to some extent in 2021; investors are hopeful that the Covid-19 vaccine rollout will help revenues of some FTSE 100 companies return to pre-coronavirus levels. However, since lockdowns and social distancing are likely to continue throughout 2021, even with a global vaccine rollout, it is worth discussing the impact of a fall in stock prices for a prolonged period of time.
Although a decline in share price will not directly cause a company to lose money, it can still have far-reaching implications for the company in a number of ways.
When share prices fall, a company’s market capitalisation falls, and so does its market value. A company’s market value is particularly important for acquisitions that are financed by using a company’s stock. Companies might have to issue more shares to raise enough proceeds or it may even have to borrow money from financial institutions if the share price falls too much. Lawyers in the Capital Markets practices may, therefore, see an increase in demand for their services as businesses require assistance preparing for these types of transactions.
Additionally, if the company is looking to raise capital, for example, to invest in research and development, or expand into new markets or locations, they might have chosen to do this via a share rights issue (where they issue more shares). However, if their share price has fallen too much, they may struggle to find shareholders that are willing to buy the shares, particularly if the share price is not expected to rise in the long term. Consequently, clients will need help from law firms with debt finance transactions (if they choose to borrow money) or even with restructuring and insolvency issues if they have insufficient assets to cover their debts.
Finally, a fall in stock prices will impact shareholders because their shares are worth less and therefore they might spend less elsewhere. If consumers spend less, businesses, particularly those that sell non-essential goods, make less money. This decline in revenue could cause businesses to become more conservative about expansion, so law firms might see a decline in M&A work for example.
The uncertainty surrounding the pandemic and Brexit, particularly in the short-term, brought volatility to the market in 2020, but what about 2021? The roll-out of the coronavirus vaccine and increased clarity over the effects of Brexit are likely to be good news for the FTSE 100. Additionally, we might see more tech stocks enter the index in 2021. Tech companies have profited from the pandemic and a number of them, including online food-delivery company Deliveroo and cybersecurity company Darktrace, have plans to float on the London Stock Exchange this year. Watch this space.
Report written by Emilia De Rosa
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