Be careful when playing ‘Footsie’

The FTSE 100 is turning 40! George Uglow celebrates the milestone, but reminds us why it pays to have a global rather than purely UK investment focus.

At the start of 2024, the UK’s FTSE 100 Index turned 40. It covers the top 100 stocks listed on the London Stock Exchange weighted by their market capitalisation.

Put simply, this is calculated by multiplying the total number of shares of a company by the present share price. 

It is the most commonly cited UK equity market index by the media, often referred to as the ‘Footsie’ or the ‘index of the leading 100 companies’. 

You will, no doubt, have heard newsreaders making somewhat meaningless statements such as the ‘The Footsie was up by 23 points today’. 

The index took over from the FT30, which was a subjectively selected portfolio of 30 companies equally weighted, which had been around since 1935. 

So, the story goes, 100 stocks were selected, as it was a nice round number and also because it was the maximum number of securities that could fit on the screens of market terminals at the time.

The FTSE provides a good case study of equity market characteristics. 

Data shows us that since 1986 the index, with no costs deducted, has turned £100 into around £2,300 before inflation, or £790 after inflation, when dividends were re-invested – known as ‘total return’. That is a pretty good reward for brave and patient investors.

In comparison, those holding cash received about 1.8% a year after inflation, although since the start of the Global Financial Crisis (November 2007), holders of cash would have seen their purchasing power fall by over 25%. As we’ve previously advised, it is risky being a long-term holder of cash.

As recently as the start of January 2020, £1 invested in the FTSE 100 had the same value as £1 invested in global developed markets.

Magnificent Seven 

However, in the past three years, the so-called ‘Magnificent Seven’ mega-cap tech stocks have driven the performance of the global markets. These are Apple, Amazon, Alphabet (Google), Meta, Micro­soft, Nvidia and Tesla.

Over the period January 1986 to December 2023, the best annual return was 42% in 1989 and the worst was -28% in 2008 – although in total the market fell 40% from peak to trough. The worst month was October 1987 when the market fell by around 26%.

Forty years is a long time in both life and markets. The make-up and influence of the market has changed quite considerably over time. 

Two key statistics stand out. Only around one third of the original FTSE 100 constituent names remain today, even taking account of various re-incarnations of firms following mergers and acquisitions. 

Some companies got relatively smaller and fell out of the index, some went bust, others delisted and a few decamped to other markets. 

The other point of note is that in 1984 when the FTSE 100 was born, the UK market represented around 7% to 10% of global markets, depending on how it is measured. 

Today, that sits at a paltry 4%. At the end of 2023, Apple Inc. had a market capitalisation larger than the whole of the UK stock market.

Negative sentiment 

Today there appears to be quite a bit of negative sentiment surrounding the structure of the UK equity market, which is in part driven by the relative surge in the value of US stocks over the past few years. 

This also reflects the sector differences between the UK and the US market. 

For example, the UK has around 23% in financials, 12% in energy and just over 1% in technology companies, whereas for the US these numbers are 13% in financials, 4% in energy and a very material 29% in technology companies. 

The performance of different sectors ebbs and flows, but it does make good sense to be globally diversified – rather than UK market-focused – to ensure that you own a broad swathe of global capitalism.

George Uglow (right) is a chartered financial planner with Cavendish Medical, specialist financial planners helping consultants in private practice and the NHS 

The content of this article is for inform­ation only and must not be considered as financial advice. Cavendish Medical always recommends that you seek independent financial advice before making any financial decisions.
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