Check the wider market fundamentals

When preparing to enter a trade, it’s important to look at what the wider market fundamentals are saying as these affect the index. For example, much of the UK 100 ’s volatility of late can be attributed to China and the oil price. Some stocks tend to move very much in line with the UK 100 and it’s no coincidence that such stocks have been as volatile as (if not more than) the index itself. Have a look at what’s outperforming and what’s underperforming sector-wise, then look again within the sectors – there will be underperformers and outperformers there too. This is especially evident in the mining sector where commodities such as gold often benefit in times of heightened market volatility.

UK 100 sectors in 2015 and into 2016

The table above summarises the 2015 performance of four UK 100 sectors and their constituents. The outperforming Household Goods & Home Construction sector was itself outperformed by most of its constituents, while both Mining and Oil & Gas were underperformed by the majority of theirs, BG Group (BG.) being the notable exception, due as it is to be bought by Royal Dutch Shell (RDSB). Note precious metals miners Randgold Resources (RRS) and Fresnillo (FRES), benefitting from safe haven demand for gold in H2 2015 and into Q1 of 2016. Remember also that 2016 has only just begun!

Diversification

Diversity in a portfolio is key to hedging against the risk of unexpected market swings. If an investor goes overweight healthcare and airlines in their portfolio, what happens when all the M&A hype that’s buoyed pharmaceuticals for the past few years dies down, the sector becomes embroiled in scandal and Russia and OPEC conveniently broker a deal that leads to a modest recovery in the oil price?   ‘If only I’d bought that oil major!’ he or she may exclaim. That’s an imaginary situation by the way, but it’s possible.