With the FTSE 100 collapsing, is it a good time to buy UK shares?

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The FTSE 100 index has become a pariah in the past few days as the UK economy takes a turn for the worse. It crashed to a low of £6,827, which was the lowest level since March 4 of this year. This means that the index has tumbled by more than 10% from its highest level in 2022. 

Is this a good time to buy UK stocks?

A common saying in finance recommends buying when everyone is fearful. And right now, everyone is fearful about the UK economy, with some analysts comparing it to an emerging market economy. There are also worries that the new policies by the government and the central bank will lead to higher inflation.

As a result, UK’s gilt yields have risen to the highest levels in years while the British pound has crashed to the lowest level on record. Sterling has fallen by more than 20% this year, making it one of the worst performing G7 currencies.

The crash of the British pound will have an impact on many FTSE 100 constituents, as we wrote in this report. For example, companies like Tesco, Ocado, and Whitbread will be hurt since they depend on imports. 

On the other hand, some companies with an international presence like Shell, BP, and Rolls-Royce Holdings could benefit as the sterling crashes.

Another potential catalyst is that FTSE 100 companies could become viable acquisition targets, especially by American private equity firms. For one, British companies are now 20% cheaper than they were in January because of the performance of the sterling.

In the past few years, some UK companies have been acquired by American firms. For example, Morrison’s was bought by Clayton, Dubilier & Rice in 2021. Similarly, Avast was bought by NortonLifeLock while Thoma Bravo was recently interested in DarkTrace.

FTSE 100 forecast

The daily chart shows that the FTSE 100 index has plunged lately. It managed to crash below the important support at £6,967, which was the lowest level in June. The index has moved to the lower side of the Bollinger Bands. 

At the same time, it has moved below all moving averages. Oscillators like the Relative Strength Index (RSI) and the MACD have continued falling. Therefore, the index will likely continue falling since it has formed an inverted cup and handle pattern. If this happens, the next key support to watch will be at £6,800.

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