Everyone has a different opinion on the trajectory of the FTSE 100 (FTSEINDICES: ^FTSE). Consensus is that it will break the 7,000 barrier in the short term, but then this is where opinion divides. Some analysts have predicted highs of 8,000 by the end of 2014, but they were also the ones telling us we would see 7,500 by the middle of the year…
Index trends in international markets impact the FTSE, and there is correlation with the record-breaking performance of the US S&P 500 and the Germany’s DAX. Merger and acquisition activity is propping up the indices across global markets and giving investors optimism. Hysteria will undoubtedly drive a push through record levels, but then what? There does not appear to be any evidence of long-term growth from the FTSE 100 constituents that can sustain long-term high levels.
The FTSE 100 is the 100 largest companies listed on the London Stock Exchange. Mining and financial services companies make up half of the index; these companies are focused on shareholder returns and efficiency rather than outright growth, which is what is needed to preserve a permanently higher and advancing index.
The index is used as a measure for the overall economy and its levels affects almost everyone, as its performance directly affects pension funds returns. All companies listed on the LSE are eligible for inclusion and are ranked in order of their size, or market capitalisation. A banding system exists to reduce volatility, and so for a company to be admitted to the index it needs to reach the 90th position in the ranking and similarly fall to the 111th place to be relegated to the FTSE 250.
Institutional investors offering funds, which benchmark the FTSE 100 and other indices, account for almost £50 billion of investment. 60% of this is held in tracker funds which are obliged to purchase exposure to the constituents of those indices. If companies are promoted to the FTSE 100, it follows that as they go in there is an increase in share prices as tracker funds buy their index allocation.
Benefits for companies in the FTSE 100 index include increased exposure and more liquidity. Additional analyst coverage and intensive commentary can also be a thorn in the crown for some CEOs: scrutiny over policy decisions, and exerted pressure on the board to meet short-term financial goals can impede focus and investment for long-term projects.