The FTSE 100 & why it doesn’t really reflect the UK economy

Sep 26, 2023 | Financial Planning, Investments

Introduction

The FTSE 100, short for the ‘Financial Times Stock Exchange’ 100 Index, is a well-known stock market indicator. It includes the top 100 companies listed on the London Stock Exchange based on their market value. While many investors see it as a reflection of the UK’s economic health, there are some significant reasons why it doesn’t provide a complete picture of the entire UK economy.

I can’t count how many times people have compared their investment portfolios to what’s going on in the FTSE 100 and a recent conversation was the prompt

In this article, we’ll briefly explore these reasons without getting to technical;

 

1. Missing the Tech Boom

Imagine a puzzle missing a vital piece (from personal experience its normally been eaten by a four legged friend), that’s the FTSE 100, why? The index leans heavily towards industries like finance, mining, and oil and gas. This means that it does not give us the full scoop on the UK’s diverse economic landscape. Also, with the absence of major tech players in the FTSE 100, the recent roaring decades for technology is hardly reflected. Where is our Amazon, Google or Microsoft? ARM, the jewel in the UK’s tech crown recently decided to list on the US based NASDAQ market which was a major blow to Rishi Sunak and the Government.

 

2. International Adventures

Wish you were here? Many FTSE 100 companies are also globe-trotters, earning most of their money outside the UK. In fact, around two-thirds of their earnings come from overseas (just take a look at HSBC!). This means that when the FTSE 100 rises or falls, it might have more to do with what’s happening abroad or even currency changes, than what’s going on at home. So, clearly it’s not always a reliable indicator of how the UK is doing domestically.

 

3. Are you local?

The FTSE 100 is like focusing on the bright lights of London while ignoring the rest of the country. It’s centered around companies listed in London, which is undoubtedly the financial heart of the UK but it misses the economic ups and downs of other regions. Economic growth, job opportunities, and overall conditions can be very different outside of London, and the FTSE 100 doesn’t always reflect that.

 

4. Small But Mighty

Think about your favourite local café or the small shop around the corner. These small and medium-sized businesses (SMEs) are like the unsung heroes of the economy. They create jobs and often innovate, but they usually don’t make it into the FTSE 100. So, when we’re looking at this index, we’re not getting the full story of the UK’s economic diversity.

You might be interested to know there is a bigger and broader FTSE 250 and also the AIM index (Alternative Investment Market), shares in which can attract very beneficial tax statuses in return for what is seen as higher risk but can actually include large, well-known brands which don’t qualify for the full FTSE for one reason or another.

 

5. Bigger Isn’t Always Better

The FTSE 100 ranking is simply based on market value, which means the bigger, more expensive companies have a louder voice. This might sound fair… but it can make the index a bit lopsided. A few giant companies can dominate the index, while others that might also be important for the economy don’t get the attention they deserve.

Of course, not every market around the world perfectly reflects the broader economy but we talk about the Dow Jones or the Hang Seng far less than the FTSE 100.

 

Conclusion

The FTSE 100 is like a snapshot of the UK economy, but it’s not the whole album. Its focus on specific industries, its global connections, and its London-centric view can make it feel like an incomplete picture, a warped mirror. To get the full story of the UK’s economic health, it’s important to look beyond the FTSE 100. Consider other indicators, explore different stock market indices, and pay attention to what’s happening in sectors like technology, which might be thriving even if it’s not in the FTSE 100 spotlight.

Written by Alex Fry (Managing Director)