The FTSE 100 is the UK’s largest stock-market index. It accounts for roughly four-fifths (80%) of London’s overall valuation. The Footsie’s 101 stocks (one is dual-listed) have a combined market value exceeding £2trn. But London’s blue-chip index has been a big disappointment over the past 21 years. Here’s why.
The FTSE 100 is a flop
On Millennium Eve (31 December 1999), the FTSE 100 hit a record closing high of 6,930.2 points. But then it crashed, more than halving by March 2003. Then it bounced back, before collapsing again during the global financial crisis of 2007/09. And since March 2009, it’s bounced and bumped for 12 years to reach current levels.
Today, the FTSE 100 stands at 7,173.35 points, gaining under 250 points — a mere 3.4% — in 21 years (excluding dividends). That’s an awful return for over two decades of global growth. The Footsie is also over 700 points — nearly a tenth (8.9%) — below its all-time closing high of 7,877.45 on 22 May 2018. Why has London’s index done so poorly and failed to break the 8,000 mark?
The 20th century’s index?
While the US S&P 500 index keeps hitting record highs in 2021, the FTSE 100 has gained only a ninth (11.1%) this year. One reason for this might be that global investors see the Footsie as an old-fashioned, decidedly 20th century index. For sure, the FTSE 100 index is packed with cheap, value, and cyclical stocks. These include banks, miners, and oil & gas producers — among the index’s biggest sectors. And given the dramatic collapse in these stocks during the Covid-19 crash of early 2020, it’s no wonder the Footsie has taken a beating. Also, with the world inexorably moving towards a future of low carbon, clean energy, and digital working, who would bet on these old-school shares?
Mega-cap companies dominate the FTSE 100
Both the S&P 500 and FTSE 100 are dominated by a handful of what I call ‘power stocks’. In the US, a clutch of mega-cap high-tech firms has driven the wider market ever higher since March 2020’s market meltdown. These huge tech giants enjoy growth rates that large UK companies can only imagine. Hence, investors are willing to pay top dollar to buy into these highly rated US market leaders.
Here in the UK, a few big names also drive the direction of the overall market. Unfortunately, the UK’s giants are in unloved sectors such as financial services, basic resources, and fossil fuels. Indeed, six of the FTSE 100’s 10 largest members fall into these three categories. And who wants to own boring giants like banks and oil firms, when by buying expensive electric vehicle stocks you can own the future?
A Brexit discount?
The last explanation is that UK stocks are unfairly under-priced due to a perceived Brexit discount. Although it’s clear that leaving the European Union has already negatively impacted the UK economy, I’m not entirely convinced by this argument. After all, at least three-quarters (75%) of FTSE 100 earnings come from overseas. Hence, a weakening pound would make these foreign earnings more valuable in pounds sterling, not less.
To sum up, I think the lack of tech stocks, focus on old-school sectors, and the Covid-19 pandemic have hit UK stocks harder than most. But I see the FTSE 100 today as offering great value, especially to income investors hunting high dividends, like me. While global investors pay eye-popping prices to buy quality and growth stocks, I’ll keep buying cheap UK stocks for their long-term value!