Business headlines: a commercial awareness walk-through.

As a law student, I have read many articles and listened to many a presentation over the years pertaining to commercial awareness. It has been stressed that this is a vital, and necessary skill for aspiring lawyers. Moreover, I feel that this is a trait necessary for all aspiring lawyers, not simply those seeking to enter the commercial practice area. Law itself is a business, many different legal areas rely on understanding the business sector, whether directly (such as commercial, litigation, IT) or indirectly (I’m going to say public law here: there may be a public interest in planning applications for business development, judicial review may be sought for  rejected planning request or business merger, and so on). Consequently, those hoping to enter the legal professional will have to have some understanding of the business world and how it operates. It is at this point that commercial awareness comes into play.

Essentially, law students need to have a grasp of what commercial awareness is, and what it entails as a skill. However – and let’s be honest here – the whole subject sounds rather vague. What exactly does ‘commercial awareness’ mean? How can you acquire this skill, and how do you improve upon it?

Cue the topic of this blog post, as I seek to provide some advice with tackling this mysterious, catch-all term. I will list a news story from the recent week pertaining to the business sector, and illustrate how you can make the most of this from a commerical perspective, and understand its significance.

FTSE (ill)Fortune

Following the pattern of the past several weeks in a row, the FTSE 100 closed down yesterday. On the 15th January, it closed at 5,804.10 points, which marked a drop of 114.13 points, or some 1.93%. 

Okay, I hear you ask. That sounds bad. Well it is, as that percentage marks a loss of almost £30bn in value. But what exactly does it mean? Well, let’s get stuck in.

1) First thing to bear in mind is that the FTSE is an index, and is composed of the 100 largest companies listed on the London Stock Exchange (LSE). These are often referred to as ‘blue chip’ companies, and the index is seen traditionally as a good indication of the performance of major companies listed in the UK.  The index is calculated every 15 seconds on every weekday -excluding UK public holidays – from 8:00AM when the market opens until 4:30PM, when the market closes. So, that figure you see mentioned on the evening news is actually the closing value.

How does it work?: The level of the FTSE 100 is calculated using the total market capitalisation of the constituent companies, and the index value to produce the single figure you see on the news. Market capitalisation or ‘market cap’, is the total market value of the shares outstanding of a publicly traded company. It is equal to the current share price times the number of shares outstanding.

Since the total market capitalisation is affected by the individual share prices of the companies, as share prices change throughout the day, the index value changes too.

In sum: when the FTSE 100 is ‘up’ or ‘down’, the change is being quoted against the previous day’s close – essentially a comparison measure of performance on a daily basis.

So, why do we care if it goes ‘up’ or ‘down’?: The level of the FTSE 100 affects most people in the UK even if they do not directly invest in it for themselves. How so? Well, this is because as pension fund holders whose investments are probably invested in UK equities, how well the index is performing directly affects the return they will receive.

I mentioned previously the index is viewed as a good indication of how major companies are performing. If they are performing poorly, generating less revenue than expected, or having been hit by a sector-specific issue (think the Volkswagen emission scandal, for example; in October 2015 Volkswagen posted its first quarterly loss for 15 years of €2.5bn and now Renault has had to admit to a fraud raid conducted on its premises) then their listing will depreciate. Consequently, its stocks subsequently lose value. Investors in said stock therefore lose money on their investment.

Fun Facts: the largest one-day percentage fall on the FTSE 100 was on the 20th October 1987 at 12.22%; this was the day following ‘Black Monday’. It reached its highest peak to date of 6930.2 on the 30th December 1999, and its lowest point of 3529.86 on the 5th March 2009 aka the depths of the global recession.

2) Second thing to bear in mind: The FTSE 100 is also a fairly good reflection of economic and international events. It will often drop in response to markets falling around the world. Remember, markets operate on a global scale: what affects one will often spread, affecting others.

For example, there are two factors affecting the FTSE 100 at the current time, assisting in the recent drop.

i) China Chaos, and
ii) Crude oil prices crunch-time.

These two factors are actually entwined. The price of a barrel of crude oil dropped below the $30 mark about three times this week, which triggered a mass sell in China. China, already having a shaky start to the year, has reached ‘bear’ market territory, meaning prices of securities have recorded a fall of 2o percent plus from a recent high. To put this into perspective: China’s benchmark index has fallen by almost 21 percent, after hitting its December peak just three weeks ago. This is raising fears that China’s economy is contracting. Consider the investment China has abroad. Remember that only recently its currency was approved by the IMF as a reserve currency.

Basically, what is happening in China is worrying markets around the world, the result being constant drops, value wiped off listings and investors losing money. Whilst the FTSE 100 is having its worst new year on record, the German DAX and the CAC in Paris also fell, and Wall Street also saw US markets faltering. Economies such the UK’s may be tentatively recovering post-2008 recession, but should the Chinese market collapse, it will have a devastating domino effect around the world.

As for falling oil prices – those who drive a car will be enjoying the price drop at the pumps and importers of oil will be happy, but companies such as BHP for example are ruing the drop. After announcing an expected £5bn writedown on the value of its US shale assets on the 15th January, the firm cited the plunging value of shale gas and oil and said it would be cutting down on its rig operations in response. And cutting down on operations will result in cutting jobs, too.

Commercial awareness: as stated above, Chinese markets are weakening, with a knock-on effect around the world. The oil industry is suffering from steady price drops, which will have a serious repercussion on the balance sheets of oil-producing and exporting nations.

Moreover, this could cause a sell-out spike, whereby worried investors may ask their portfolio manager to sell their shares, as they are concerned they are only losing money as the markets continue to tumble. This has another knock-on effect, in the sense that a mass sell-out results in the listed companies losing more value off their stock share, and so the FTSE 100 as a whole records another drop in overall value. Sell-outs have already occurred over the past few weeks in response to the terrible year 2016 is proving to be for global markets already.

Yet there could be hope for the companies and markets as a whole, in the sense that there are those who believe this sell-out may be coming to an end, and so there will not be a mass sell-out. The market needs a ‘bounce’ – think of it as an electric shock from a defibrillator – which is essentially a recovery from a period of decline, or in the case of the Chinese markets, a ‘bear’ market. This bounce will in turn spark some confidence in traders to buy stock shares, or ‘buy a bounce’. Yet this is really only a short-term strategy – traders do this in an attempt to profit from a short-term market correction i.e. recovery – and so a ‘bounce’ is, in itself, a temporary recovery. So, it could lead to a repeat of the above, a rather costly cycle. Then again, markets are always in a state of flux, and you never truly know how it will flow from one day to the next!

In sum: the markets are under pressure, governments will be keeping a close watch on their stock markets and begin to calculate the effects on their national economies. In cases such as China, the government may even step in and temporarily shut down the markets to prevent further losses. Keep in mind that the Eurozone is under strain generally, too. Investors will either be hesitant with their money, therefore displaying limited confidence in the markets and so listed companies, or else they will be bold and buy in, thinking a temporary recovery is on the way and they can profit from it.

All this I was able to ascertain from watching the news and reading a few online articles. I cannot recommend keeping on top of current affairs enough to all law students. It pays to know what is going on in the world. Remember, events in one area e.g. business will have a knock-on effect in other areas, such as law and politics.

So make yourself think: read an article, watch the news and think about the ramifications of a further drop in the stock market may be. Moreover, imagine you were advising a client who wanted to merge with a company in an industry sector which is currently depreciating in value. What would say/do? Practice makes perfect, so keep repeating this exercise and keep your mind open. Law firms want candidates who are aware of current affairs, and who can piece together the jigsaw, understanding how law and business entwine.

I hope I have been able to provide some idea and support into this area with this post; remember that it is about the process of thinking and interpreting. Being commercially aware does not mean being a PhD economist with all the answers. Rather, it means you attempt to make sense of complex area with the knowledge you have and the research you have undertaken.