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https://images.mktw.net/im-266512London’s FTSE 100 stock index will celebrate its 40th birthday on Wednesday. But it’s been a hard life for U.K’s blue-chip barometer since it came of age.
After the Footsie
UK:UKX,
as it’s known, was launched in January 1984, an idyllic youth has given way to an austere adulthood for the U.K.’s blue-chip index, according to Laith Khalaf, head of investment analysis at AJ Bell.
“The U.K. stock market finds itself in a quagmire of existential angst,” he said in a note sent to media. “The headline index has made almost no progress since the start of the century, and in the last decade the Footsie has been totally eclipsed by the U.S. stock market, which is winning company listings and financial flows.”
It all started so well. Khalaf has crunched the numbers and found that for the last six years of the 1980’s the Footsie enjoyed an annualized return in British pounds of 15.9%.
In the 1990’s it posted an annualized return of 11.1%, similar to the rest of Europe, better than the MSCI World’s 9.6%, and only a few percentage points behind the S&P 500’s
SPX
15.3% gain.
But since the turn of the millennium things have not gone as well for the Footsie. All markets struggled in the noughties because of the 2008 financial crisis, but in the 2010’s the Footsie’s 1.6% return is paltry next to the S&P 500’s 13.4% and Europe’s 4.7%. The 2020’s are even worse, with the Footsie up 0.5%, Europe up 5.2% and the S&P 500 up 11.5%.
Source: AJ Bell
Khalaf sees the Brexit decision in 2016 and the subsequent dwindling of new listings as partly responsible for the London market’s poor performance of late as domestic investors relentlessly sold U.K. equity funds in favor of more global offerings. A lack of big technology names has not helped either.
Foreign investors also have lost little sleep shunning U.K. equities, according to Khalaf.
“U.K. stocks now make up just 4% of the global developed stock market, down from 10% a little over a decade ago,” he said. “That’s less than the amount made up by Apple
AAPL,
or Microsoft
MSFT,
individually, and is a small enough fraction of the MSCI World Index that global fund managers could happily turn a blind eye towards the UK without taking too much risk against their benchmark.”
Khalaf warns that the more people divest from the U.K. and the fewer invest fresh funds in it, the less relevant it becomes on the global stage, potentially creating a vicious downward spiral.
However, the FTSE 100 has lots of big dividend payers, currently producing an index yield of 3.97%, much better than the S&P 500’s 1.45%. And so, as the table below shows, with dividends reinvested the U.K. blue-chip barometer’s annualized return performance isn’t quite so bad.
Source: AJ Bell
One must also consider currency movements too, particularly given sterling has weakened markedly against the dollar and euro since the turn of the century.
“While weaker sterling does help to boost the share prices of FTSE 100 companies due to their international revenue streams, it has an even greater effect on the sterling returns enjoyed by overseas indices because of their even greater exposure to dollars and euros,” notes Khalaf.
Still, even adjusting for currency and dividends, the FTSE 100 has been at the back of the pack in terms of generating returns in the 2010s and 2020s so far, according to Khalaf.
Source: AJ Bell
“The rise of growth investing and indexing has not been particularly kind to the U.K. stock market and its collection of old economy stocks like banks, insurance firms and mining companies, Khalaf said.
“The U.K. does look undervalued compared to the U.S. market, but that has been the case for most of the last 40 years. Contrarian investors might still be tempted to buy U.K. stocks, though they would need to exercise some patience as a renaissance may not materialize any time soon.”
On Tuesday the FTSE 100 was down 0.3%.
