Apple has turn out to be the primary firm price US$2 trillion (£1.7 trillion), that means that it’s now extra worthwhile than all the businesses within the FTSE 100 (they add as much as £1.5 trillion). That is extraordinary information about one American tech firm, nevertheless it additionally factors to the truth that FTSE 100 share costs have carried out poorly towards rival indices around the globe for a number of a long time. As we will see, nevertheless, it’s a extra sophisticated story than it first seems.
If an investor had purchased £1,000 of the shares of all the businesses on the FTSE 100 on January 31 2001 and offered them on July 31 of this 12 months, she would have misplaced £63.48, a worth return of -6.3%, even earlier than you’re taking inflation into consideration.
This was no less than a greater efficiency than one main index, the Euro Stoxx 50. The constituents of this index are blue-chip corporations from 9 eurozone nations (Belgium, Finland, France, Germany, Eire, Italy, Luxembourg, the Netherlands and Spain). Investing on this index in the identical interval would have decreased your pot by 33.6% (that’s £664 in your £1,000 funding after 20 years).
However each the FTSE 100 and Euro Stoxx 50 evaluate poorly towards different worldwide indices, as might be seen within the graph beneath (click on on it to make it greater). Over the identical interval, Japan’s Nikkei 300 went up 17.9%, Germany’s DAX achieved 81.2%, and the American Dow Jones Industrial Common achieved 142.7%.
Inventory indices in contrast
Buying and selling View
Making sense of the numbers
To some extent, the FTSE’s poor efficiency might be defined by exterior forces. If we solely take a look at the interval from January 31 2001 to Might 31 2016, the month earlier than the European referendum, the FTSE 100 was solely down 1.1% (as a substitute of our 20-year -6.3%). This was comparatively higher in comparison with the Euro Stoxx 50, which achieved -35.9% over that interval. And though the pre-referendum FTSE 100 was nonetheless a lot worse than the Nikkei, DAX and Dow Jones, it’s much less so than earlier than: their respective rises over the identical interval are 5.2%, 51% and 63.3%.
Even then, there have been a number of mitigating elements for the FTSE 100 because the Brexit vote. It reached an all-time peak in Might 2018, buoyed by a weaker pound and a truce within the commerce struggle between the US and China.
It has additionally carried out notably poorly because the COVID-19 outbreak. From January 2001 to January 2020, the FTSE 100 was truly up 15.7%. The Euro Stoxx 50 was down 23.8% over the identical interval, whereas the Nikkei, DAX and Dow Jones achieved 30.6%, 91.1% and 159.5% respectively.
Because of this Brexit and COVID-19 would possibly clarify a number of the poor efficiency of FTSE 100 corporations within the final 20 years. However what different elements are in play?
The businesses within the FTSE 100, particularly the largest ones, are inclined to belong to conventional industries comparable to prescribed drugs (AstraZeneca and GlaxoSmithKline), banking (HSBC), mining (BHP), and oil and gasoline (Royal Dutch Shell and BP). The publicity of the index to the banking business has maybe been notably detrimental to the efficiency of the FTSE 100.
The graph beneath plots the efficiency of the entire index towards the efficiency of its banking and computing shares. As you possibly can see, banking shares have carried out notably badly within the final 20 years. For instance Barclays’s shares have misplaced round 48% of their worth since 2001. One of many causes for such a poor efficiency, along with the monetary disaster, is prone to be that low rates of interest have squeezed banks’ revenue margins.
Whole FTSE 100 vs banking and computing shares
One other potential cause for the underperformance of the FTSE 100 is that there are only a few IT corporations. Tech shares like Apple and Microsoft have a really giant weighting within the US, however their UK-listed equivalents symbolize a really small weight within the FTSE 100.
The rationale why the share costs of IT corporations are inclined to carry out higher is that they’re normally youthful and thus have stronger progress alternatives. True to type, the IT corporations on the FTSE 100 have carried out comparatively properly previously decade, even when they’ve been fairly risky within the final couple of years, most likely due to the uncertainty associated to the specter of a no-deal Brexit.
For instance, Avast is a Czech firm that has been listed in London since Might 2018. Since then, the inventory worth has grown by round 130%.
Nevertheless it’s not solely very younger IT corporations which have sturdy progress alternatives. Aveva is one other FTSE 100 firm listed in London, having been based in 1967 in Cambridge as a government-funded analysis institute. Its annual common progress in inventory worth has been 182% since 2001.
Small caps and dividends
But when these elements have all performed a task in why the FTSE 100 has in contrast poorly in worth phrases, there are a number of different essential caveats that somewhat change the image. First, the weak spot has primarily been with the massive blue-chip corporations listed within the UK.
You may see this if you take a look at the FTSE 250, which is an index of smaller corporations that are usually based mostly the UK somewhat than having the worldwide dimension of the FTSE 100. Over the identical 20-year interval, the FTSE 250 is up 51.4% – properly forward of the Nikkei and never far behind the DAX.
Second, we’ve got thus far solely regarded on the uncooked worth return of the FTSE 100. This ignores the truth that conventional corporations of the type that dominate the FTSE 100 additionally distribute dividends. To get a full view of corporations’ efficiency, it’s a must to issue these in too.
Based on the calculations right here, the identical £1,000 invested into the FTSE 100 that we talked about originally of the article would have roughly doubled over the past couple of a long time when you included the earnings from dividends and frequently reinvested it again into corporations within the index. Beneath is a chart to point out the comparability over simply the final 5 years.
FTSE 100 Whole Return vs FTSE 100
Although you would need to receive the identical knowledge for our different indices to make a really truthful comparability, and I couldn’t supply all of it on the time of writing, the German DAX truly does embrace dividends in its numbers. So because it achieved 81.2% in our 20-year interval, the UK returns develop into pretty related.