World War 3 on the way? (Pt.2)
Capital markets, as predicted, have responded to the ongoing Russian invasion of Ukrainian soil. How does this affect UK stocks in particular?
Before you read this article, please read ‘World War 3 on the way? (Pt.1)’
World War 3 on the way? (Pt.1) post
Picking up from the previous post, we saw that the price of oil per barrel has a big effect on the global economy. Typical increases in the oil prices have detrimental effects to the end consumer because the entire supply chain becomes more costly. However, not everyone is affected negatively by the increase in oil prices. Firstly countries that export oil such as the OPEC (Organization of Petroleum Exporting Countries) will benefit from increased prices, thus receiving more government revenue. Secondly, oil company stocks can experience an increase in their share prices as they will charge more at the fuel station. Thirdly, retail investors in the commodities market that held oil before the increase could sell off their oil and earn returns. But we are not here to discuss the countries or companies that are benefitting due to the oil price hike. We are here to see the effect of the UK Stock Market due to the Russian invasion of Ukraine.
As I am writing this, the price of oil per barrel is at US$120 per barrel. Pre-Russian invasion, the price stood at the US$100. This signifies that the price of oil has increased by 20% alone in just a week. One simplistic way of looking at the performance of an entire stock market, investors and research analysts use the indexes of stock markets. I am sure some of you are familiar with some stock market indexes such as the DJIA (Dow Jones Industrial Average)[USA], S&P500[USA], S&P/ASX 200[AUS], S&P/TSX 60[CAN], CAC 40[FRA], Nikkei 225[JPY], FTSE 100[UK], FTSE/JSE Top 40[SA], Hang Seng Index[HK], and in Zimbabwe, we have the ZSE Top 10 (cool and simple, yeah?) Within a stock market, you will likely find lots of indexes that represent different companies according to either their market cap or industry they operate in.
For the UK stock market, the FTSE 100 is the flagship index and it is tracks the top 100 companies ,listed on the London Stock Exchange, according to market cap (though there are approximately 2,000 companies listed on the London Stock Exchange). FTSE 100 is mostly used because changes in the stock prices of these companies will have a greater effect on the entire stock market. The other indexes are FTSE 250, FTSE 300 and the FTSE All-Share. Besides being used as a performance tracker for the stock market, indexes are used by portfolio managers and investors as a benchmark for assessment purposes to see if they were able to “beat the market” with their investment strategies and portfolio management skills. In the succeeding post, we will dive into the analysis of the FTSE 100 in relation to the on-going Russian invasion. This post was meant to introduce you to indexes and their uses.
Kind regards,
Nqobani Ndebele