The FTSE100 hits middle-age this week, (mutedly) celebrating its 40th birthday (3rd January). As many gentlemen of a certain vintage will have noticed, one’s metabolism slows down as the years tick by, and gravity sees one’s heft move down to create bulk below the chest region. The Footsie is now transitioning into a more mature phase, but will it last until it can collect its carriage clock in 2049?
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The FTSE100 superseded the FT30 Index – a much narrower and trend-related index similar to the Dow Jones Industrial Average – and when created was envisaged to be a reflection of the ‘Best of British’. The Footsie was launched in a period when global stock markets were undergoing a revolution, changing from paper-trading, open outcry, to an era of electronic trading and derivatives, and the broader-base of the FTSE100 fitted well into the new age.
However, the initial aspirations for the Footsie to reflect the British economy hasn’t played out, given the way that the LSE calculates its constituents on pure market cap – a simple calculation of number of shares x price per share updated quarterly – meant that the index was dominated by multinationals. The FTSE250 is a better barometer of the health of the UK economy.
There was no technical reason why ‘100’ was chosen as the numeric for the new flagship index apart from it being a nice, round, marketable number and the maximum amount of entries that could be filled onto one sheet of the Topic electronic information terminals that the LSE used.
FTSE 100 has seen peaks and troughs
The FTSE100’s teenage years and twenties were quite turbulent with numerous world economic events. But by the end of its first decade, its closing value had risen from 1,000 points to 3,065 points and it continued on the upwards escalator for the next five years. Hitting its sweet sixteen at the turn of the millennium the FTSE100 was just shy of 7,000 points, at 6,930 points (1st December 1999) and had to that point seemed to be a worthwhile experiment.
However, since the calendar turned to 2000 (and computers didn’t stop working and ‘planes didn’t fall from the sky) the FTSE100 hasn’t moved much, starting the 2000s at 6,268.5 points and opening this year at 7,710.5 points, a move of just 23% over 23-years.
To be fair, investors have received a consistent stream of dividend payouts over that period, and there have been peaks and troughs, but the index has been moribund this century and like the Ford Orion, which shares the FTSE100’s anniversary, the index is now looking flabby and a bit dated.
The world has moved along immeasurably since 1984, when Paul McCartney had the number one single at the start of the year. Remarkably, McCartney was still in the Top 10 at the end of 2023, trailing that other 80s icon, Shakin’ Stevens who settled at number one in the end-of-year charts. Over a quarter (26 companies) have run the course from start to finish, but the index is still heavy in banks, insurance companies and international miners who all rushed into the Footsie in the 1990s. Some of this quarter have changed names and become reconstituted entries. A fair few of the original index have disappeared altogether, a throw-back to a pre–Big Bang, post-colonial age. But the issue for the FTSE100 has been attracting new blood, and arguably the slim pickings, and regulatory regime that governs the LSE, has seen high-growth firms opting to move to other markets that represent a standard-bearer of the future, as opposed to a museum of a rose-tinted past.
FTSE 100 tweaks and adjustments
The health of the FTSE100 is reflection of the UK economy gradually losing its place at the top table. The LSE knows it has to make changes and has gone through numerous consultations and tweaks and regulatory adjustments, but to date this hasn’t changed the direction of travel. At the end of last year, there was frisson of excitement as it was rumoured that Shein might seek a London listing this year, but its likely that the Chinese fast-fashion firm will end up IPO-ing in New York, a path that many potential large new listings to the LSE have beaten over the last half-decade.
What the FTSE100 has helped its parent group to do is cement itself at the core of the data-business, as passive and index-linked investment swallowed up increasing market share. However, on its 40th birthday, the FTSE100 finds itself at a critical branch in the road. The global economy in 40 years time will not look like the global economy today, and to have a slice of the future pie, the LSE and by association the FTSE needs to start attracting the future global titans today.
When the FTSE100 first came to light, it used to be the go-to index for companies looking for an index that would put them in the global spotlight, an index that was traded across the world, with high liquidity and legions of investors queuing up to buy-in. In 2024, the FTSE and FTSE100 can’t honestly say that this is what a company can expect through listing.
Reinvesting dividends
The best-performing names on that original list – if dividends were reinvested – are cigarette manufacturer, British American Tobacco LON:BATS and data analytics business, Relx, LON:REL, formerly known as Reed International originally founded as a trade directory business; the former returning around 16.4% a year and the latter 14.4% a year since inception of the FTSE100.However, these two companies, which have if investors had reinvested dividends, been good for the last four decades, are not future industry companies (although one could argue that in the coming decades data will remain core to commerce). The global weightings of the UK stock markets have been gradually falling, a trend that accelerated since 2016, and now the total market cap of UK stocks is less than Microsoft NASDAQ:MSFT or Apple [NASDAQ: APPL] individually, at just 4% of the developed markets stock markets, and it’s at the point where global fund managers could almost ignore the UK and not have their benchmarks affected.
Growth stocks in the FTSE 250
That is the big picture, and it will take time for the LSE to turn that around, if ever. But on a more micro level, although the FTSE100 is still dominated by ‘old economy’ names, at least these veritable old greybeards pay investors back for their patience, something that the more growth-y investments don’t. The FTSE100 may be close to running its race, but ignore the UK at your peril, the FTSE250 midcap index has been outperforming its blue-ribbon brother and it would be sensible hunting around in the shelves of the floor below the Footsie for less-storied companies with growth potential that could be the future giants waving the UK flag across the world.
