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A different perspective on markets – why the FTSE 100 isn’t the UK economy

Technical Article

Publication date:

18 June 2019

Last updated:

23 September 2019


Technical Connection

The FTSE 100 is frequently thought of as the UK’s premier equity index. Put simply, it isn’t. As much as 80% of its total sales are made outside of the UK.

The FTSE 100 is made up of the largest 100 companies that are listed in the UK. A listing in the UK means that a company will have an office here, and its shares will trade on the London Stock Exchange, priced in Sterling. Some FTSE 100 companies, such as Sainsbury’s and Auto Trader do most of their business in the UK.

However, many FTSE 100 companies are multinationals that do almost no domestic business here. Their UK listing could be a historical accident, or maybe a matter of convenience. If you’re a company operating in one of the eight time zones between the UK and Singapore, then a London listing can be a helpful way of raising capital.

As a result, though, it makes little sense to invest in the FTSE 100 solely on the basis of your views on the UK economy.


A case in point

In the years 2014 and 2015, the UK and US economies both grew at around 2.6% per year. Interest rates were similar. Inflation was similar. Back then, there were no big political shifts to worry about. But those two years were bad for oil – which fell by more than 60%. Other commodities were dragged down too – copper, natural gas and aluminium all lost more than 40%.

From an economic standpoint, oil is marginal to both the US and the UK. Energy and mining contribute roughly the same amount to each country’s economy – around 2% of US output, and 1.5% of UK output.

Yet in those 24 months the US equity market rose 11% while the UK equity market fell 8%. Why? The 20% difference in performance between the two indices had little to do with the underlying economies of the two countries, and far more to do with the sectoral exposure of their stock markets. It wasn’t Britain vs. America – it was the energy exposure of London-listed companies.

In Britain, many multinationals listed in London are in the energy and materials sectors. Some of the big names are familiar, such as Royal Dutch Shell and BP. Others are less well-known – Evraz, for example, was founded in Moscow in 1992 and now mines coal and iron ore in Russia, Canada, Ukraine, South Africa and Kazakhstan.

These companies focus on making deep holes in the ground and selling what they find down there. When what they sell more than halves in value, they make less money – and as a result their share prices fall. During 2014 and 2015, BP and Shell lost over a 25% of their worth, while Evraz fell by more than 30%. And because these types of companies make up nearly a third of the FTSE 100 any significant movements in their share prices will have a significant effect on the performance of the UK stock market.

American energy and materials companies felt the same pain, but because they represent less than 10% of the US stock market the impact is less severe. Because most of the companies listed in the US do the bulk of their business there, the US equity market is in fact actually closer to the underlying US economy. As much as 75% of the S&P 500’s companies’ sales come from within the US.

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This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.