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The news is full of stories of inflation, rate hikes, strikes and bankrupt companies ruining the UK economy. I have seen the UK described as a basket case and by extension the UK stock market. Now whether or not the UK economy is doomed is irrelevant to the point I want to make. Whether it is a stock market or a stock index is not necessarily the same as the economy of your country. That is particularly true of the FTSE 100 index, which I am still happy to keep investing in.
FTSE 100 near its all-time high
The FTSE 100 reached 7,877.45 points on June 19, 2019. As it stands, that is its all-time high. Right now, the index is just below that, at 7,764 points, but it’s been close this week. Flirting with all-time highs suggests that the index, and by extension the companies whose stocks comprise it, are doing well. How can that be if the UK economy is seemingly stagnant? Well, around three-quarters of the revenue of FTSE 100 companies comes from outside the UK.
There are variations among the 100 or more among the companies in the index. AstraZeneca he earns around a tenth of his income in the UK. NatWest on the other hand, it obtains around 95% of its income on these shores. Many FTSE 100 companies report in sterling. Therefore, exchange rate movements will affect your foreign earnings and therefore your share prices. And a terrible UK economy is definitely not a good thing for the FTSE 100, but overall, in terms of income generation, its luck should depend more on what happens in the rest of the world, rather than what happens in the UK. United. .
Underperforming Index
Since March 2016, the FTSE 100 has underperformed the US S&P 500, the German Dax and the Japanese Nikkei 225. The performance lag was especially pronounced in the post-coronavirus global market crash boom in early 2020. Now, one interpretation of the underperformance is that the UK economy, particularly the effect of Brexit, has been holding back the index. But, looking more closely, it appears that the FTSE 100 held up quite well, while other indices started to fall at the end of 2021 and into 2022.
I think it has a lot to do with the composition of the index. It is important to know what you are buying. The FTSE 100 is heavily weighted towards the financial, consumer defense and basic materials (mining) industries and is a value oriented index. It is short on growth stocks and technology names in particular.
Having light growth has been a benefit of late. But it probably won’t always be that way. So while I am happy to continue to invest in the FTSE 100, in the form of individual stock picks in my Stocks and Equities ISA, and through a tracker in my SIPP, I recognize its strengths and weaknesses. Investing in it gives me exposure to the global economy, but mainly to a few, what could be called old world industries. That’s not enough diversification for my stock portfolio, so I’m happy to look outside the index as well.
