The FTSE 100 hits middle age with a confidence crisis

The FTSE 100 hits middle age with a confidence crisis

• FTSE 100 turns 40 on Wednesday 3 January, amid concerns about its appeal to investors.
• It’s lagged global peers in the last year and is considered to be under-valued.
• But the index has dependable characteristics with many listed companies more reliable income generators.
• The index has risen from 1,000 to around 7,730 to provide a capital return of more than 670% over four decades.
• 26 companies listed in 1984 are still in the index, and 15 have made gains over the last year.
• Four companies have consistently made the top ten best performing stocks, over 5, 10 and 20 years.
• JD Sports, London Stock Exchange Group, Diploma and Ashstead also all made double digit gains over the last year.
• Despite current confidence crisis, prospects for 2024 look positive.

Susannah Streeter, head of money and markets, Hargreaves Lansdown:

‘’As the FTSE 100 hits 40 it appears to be suffering a confidence crisis, feeling shunned by some investors, and seeing rival exchanges lure away its members. The Nasdaq and S&P 500 are the more mature and more successful players on the global scene, making huge strides over 2023, but even Germany’s DAX has risen 20% over the past year, while the FTSE managed to only climb 3.7%.

There have been plenty of setbacks of recent years, including the Brexit hangover, UK political turmoil and inflationary headaches, which are partly to blame for a drought of big listings. But marking this milestone is an opportunity to assess the dependable credentials of this index, rather than wallow in pools of pessimism.

The combined value of its constituents currently stands at £1.9 trillion, keeping it firmly near the top of the exchange pack. Investors should always have their eye on a long-term horizon and since its inception in 1984 up until the end of 2023, the FTSE 100 rose by 673%, outperforming gold and UK government bonds.

Biggest gainers on FTSE 100

Publisher Relx, first listed on the FTSE 100 as Reed International, has produced the largest share of market returns over the last four decades, closely followed by British American Tobacco and Rio Tinto. 15 of the 26 original constituents which were in the FTSE 100 back on 3 January 1984 have risen over the past year. The biggest gainer was Marks and Spencer, up 115%. Over the past two decades four names, JD Sports, Ashstead, London Stock Exchange Group and Diploma have regularly popped up as being among the biggest risers over key time periods. All four companies were in the top ten performing stocks, over the last twenty years, over the last ten years and over the last five years, and all ended 2023 having gained double digits. Tech stocks hold huge weight on the Nasdaq and S&P 500 and while attention has been grabbed by the so called ‘magnificent seven’ and their prowess in seizing AI opportunities, the trajectory for artificial intelligence is far from clear and there is likely to be volatility along the way. Most US tech focused firms also don’t pay dividends, unlike many of the constituents of the FTSE 100. Listed multinationals have global sources of revenue and are highly cash generating, so are more reliable income players.

Trajectory of the index over the past four decades

Over time the index has seen plenty of ups and downs. At the turn of the millennium the FTSE 100 was on a high, reaching 6930, before the dot.com bubble burst in 2000, and then terror attacks in New York sideswiped confidence, pushing the index down below 4500. Waves of bad news emanating from big debts in the telecoms industry keep crashing and the war in Iraq further knocked confidence in 2003. But China’s rapid growth helped the index, and its commodity giants to recover until the Great Financial Crisis knocked sentiment back again, from September 2007. The credit crunch and knock-on recession pushed the index back down to a low of 3512 in March 2009. Although the Brexit vote rattled nerves, it had a greater impact on the pound. The FTSE 100 is packed with multinational companies which benefit from weaker sterling and so, after an initial slump in the first two trading days following the Brexit vote, the FTSE 100 largely gained ground through to 2018. However, uncertainty surrounding the future relationship with Europe and a volatile pound dogged the index over the next few years. It was the Pandemic which caused the biggest shock to the system since the Financial Crisis, with energy stocks falling dramatically as the price of crude dropped like a stone, before a sharp recovery in 2021, and small gains in 2022 and 2023.

Prospects for FTSE in 2024

Despite the pessimism shown towards UK stocks recently, the circling of private equity firms over the index, pouncing on choice names, is a sign that UK listed companies could be good candidates for a resurgence in valuation. Inflation is heading in the right direction, albeit with a stubborn nature, and interest rate cuts are expected to start later next year, easing pressure on companies needing to refinance and on consumers, and providing a tailwind for discretionary stocks. If interest rates do start heading lower, that’s likely to benefit housebuilders but also banks, given that fears of loans turning bad will dissipate, even though net interest margins are set to fall. Hopes are high that the US economy will have a soft landing, reducing a threat to global growth, which would help commodity stocks. Crude prices may have suffered in recent months, but with conflict in the Middle East, and OPEC+ poised to take further action to reduce supply, energy costs are likely to stay elevated helping oil giants. Of course, there may well be other events which intervene to trip up progress, but the FTSE 100 remains undervalued compared to its global peers and looks set to recover in 2024.’’

*Between 3 Jan 2023 and 29 December 2023

FTSE 100 members showing greatest return during 20,10- and 5-year periods.

 Source: FTSE Russell