The experts at IG, an online trading and investments provider, discuss how the so-called earnings recession will affect more companies than many people realise:
Online trading has blossomed over the last decade. In the same way the internet has opened up previously closed circles to the masses, online platforms have made it possible for anyone to invest like a pro. However, as with all innovations, caution is paramount. According to financial analysts, turbulence reigned supreme in the third quarter of 2019.
Described as an earnings recession, the latest figures show a 4.5% fall in profits for UK-listed companies. Although revenue and sales were up 4.6% for the quarter, that was below the average for the last three years. What’s more, the latest quarterly findings show UK plc profits of £189.7 billion are down 1.6% on Q2 of 2019.
Instability can be a blessing and a curse
In times of instability, professional traders often thrive. Because online trading has opened up the ability to invest on either side of the coin (i.e. trade against profits increasing or decreasing), acute insights can pay dividends.
However, just as instability can present opportunities for seasoned traders, it can hamper novices. CEOs are forced to tread carefully when profits start to slide, and aspiring traders must do the same.
Again, the internet has provided a solution. In the same way consumers can sample their favourite musical tracks for free, online trading sites offer demo accounts. Loaded up with a virtual bankroll, a demo trading account should provide full functionality without the cost.
From getting access to financial charts, data feeds and multiple investment options, including forex and CFDs, these accounts are for beginners.
Additionally, demo accounts can be useful for experienced traders during times of uncertainty. Even if someone thinks they know how to capitalise on an earnings recession, it’s always worth testing a theory first.
With demo accounts, professional traders can use market simulators to run through potential investment strategies in various scenarios.
This is particularly useful in times of uncertainty because the lack of clear direction can make it tougher than usual to see what the right moves are.
Put simply, demo accounts not only introduce novices to the game but provide experienced traders with new ways to test ideas without risking their bankroll.
Understanding why is the key to staying afloat
Of course, practice is only one part of the equation when it comes to playing the financial markets. Without understanding why markets move, knowing the mechanics of investing is almost worthless. The current earnings recession is largely due to the weakening of the pound.
Although the oil industry has remained a fairly consistent performer, revenue was lower in dollar terms due to the pound. For companies such as Cairn Energy PLC, this has resulted in share prices taking a tumble from €1.34 to €1.14 over the last six months.
It’s a similar story for the Royal Bank of Scotland. Alongside issues with the pound, uncertainty regarding interest rates has seen share prices fall from £2.30 in May 2019 to £2.21 in November 2019.
Brexit certainty, or lack thereof, is a major reason for the weakening of the pound and, in turn, the drop in profits for UK-listed companies. In practice, the tide will eventually turn and the nation’s largest corporations will see an upturn in fortunes. However, the latest figures prove that it’s a testing time not just for CEOs but traders and the public in general.
While investors have battened down the hatches hoping for a smoother ride, consumers are facing price increases and potential drops in service.
Although the reality may not prove as bleak, it’s an example of how financial swings affect us all. Regardless of your place in the market, everyone has a stake to some extent and the key to surviving is learning how to stay afloat until the tide changes.