Cornish Guardian (St. Austell & Fowey)
Is the FTSE 100 the same as UK economy?
YOU may have seen the bright shiny headlines that the FTSE 100 is at an all-time high.
This was followed by attaching propaganda to the headline explaining that the UK economy is in fantastic shape.
Matching the UK economy to the FTSE 100 is the equivalent of using me as a barometer for tall, dark-haired men. I am also 16 years older than the FTSE 100.
The reality? The FTSE 100 offers virtually no meaningful reflection of the UK economy at all. To believe so is confirmation bias in the extreme. The FTSE 250 or FTSE Allshare are better examples, but not perfect.
The FTSE 100 is simply a club of the biggest businesses who decide to list on the London Stock Exchange ranked by their market capitalisation. They could just as easily list on Wall Street.
These are multinational giants exposed to global markets and raking in revenues overseas, and then repatriating that money back to the UK in sterling.
A strong dollar, or euro versus sterling will mean that when the profits from overseas are brought back into the UK the profits are exaggerated because of the exchange rate. Low sterling equals higher profits.
The US is currently battling stubborn inflation and “rate drop” hopes have been dampened with the potential for rate rises, which boosts the dollar and thus the exchange rate between the dollar and sterling.
UK inflation has fallen close to the Bank of England target, opening the possibility of earlier rate drops in the UK which can weaken sterling – which, in turn, again helps those FTSE 100 companies repatriating their profits.
Around 75% of these companies earn their revenues in dollars, so you can see how the sterling-dollar exchange rate exaggerates profits.
The FTSE 100 is also highly skewed toward those supervalued companies, and small movements in big companies equal a response.
Energy companies have dined out on the UK taxpayer over the past few years and their gains have catapulted the FTSE 100 – hardly reflective at all of the UK economy which, in reality, they are crushing because of the inflation they create in the prices of food, delivery and energy as a whole.
A rise in oil prices because of global political instability boosts energy companies’ profits, but what has that to do with the UK domestic economy? Finance and pharmaceuticals are two other sectors with heavy weightings in the FTSE 100 which can provide disproportionate returns in distorted index comparison to the domestic returns (both up and down): so when the media are being used to boost the good feeling in the UK (maybe an election is coming), which are the best indices to compare to understand the UK market better?
The FTSE 250 contains those companies listed from 101 to 350 in terms of capitalisation, which is a more accurate barometer of the UK domestic market and how UK customers are spending and businesses are investing, consumer confidence and how government policies are affecting the local markets.
It also contains a wider range of sectors and industries, with less concentration in any single sector.
The FTSE Allshare covers a broader spectrum again, with nearly 600 companies from the FTSE 100, FTSE 250 and FTSE small cap indices. It covers nearly 98% of the UK’S market capitalisation, which can be viewed as a more accurate reflection of the UK economy.
If you wanted to look lower for signs of growth in an economy you could just look at small cap funds and those listed on the alternative investment market (AIM) which provide deeper exposure to the UK market and are much more sensitive to changes in the local policies and economy.
As for the performance of the indices – well, energy has had a good run over the past five years and the FTSE 100 is up over 8% more than the FTSE 250. Buried in that is a cliff-edge fall of the “covid times”. Most interesting, however, is that the smaller UK indices have significantly outperformed the FTSE 100 over the past six months, with the FTSE 250 showing a 50% uplift on the FTSE 100 alone. » If you have a financial question, I’d be happy to answer it. Please call 01872 222422.
» Peter Mcgahan is the chief executive officer of independent financial adviser Worldwide Financial Planning. Worldwide Financial Planning is authorised and regulated by the Financial Conduct Authority.