We remain in a low interest rate environment, bond purchases by the Federal Reserve have only recently come to an end, and the expectation that the European Central Bank will continue its loose monetary policy has helped to buoy risk assets.
Quantitative easing speculation has also helped to drive down sovereign debt interest rates, so the case for there being little alternative for yield seekers apart from equities has been strengthened to an extent.
With a large part of the FTSE 100 being made up of companies such as BHP Billiton, Rio Tinto and Glencore, the large exposure to the mining sector – which currently accounts for 8.15% of the FTSE 100 weight, the long-running bear market in commodities, which is yet to show any signs of bottoming – has tended to weigh on the index in recent years.
Slowing Chinese demand for commodities on the back of an economy that continues to struggle to turn to a consumer-led market from that of a heavily publically invested one could lead to a slowdown in commodities demand globally. If we were to assume that the bear market in commodities continues throughout the first quarter of 2015, we could expect that it would continue to negatively impact emerging market economies. Given that FTSE 100 companies derive almost 33% of profits from the EM, this would not bode well.
Looking at the broader index, the FTSE 350 becomes rather enlightening. Many would admit that the FTSE 250 is a better reflection of the UK economy than that of the FTSE 100 for all the reasons given above, and the weighting towards commodities is usually not as pronounced.