Norbert Van Veldhuizen
The FTSE 100’s forty years of openness to some of the best global companies should be a cause for celebration.
- The FTSE 100 has a heavy influence of foreign earnings, which some commentators regard as equivalent to failing to support the local team.
- The FTSE 100’s international diversification is not a recent phenomenon, but rather a continuation of the UK’s global and open stock market tradition.
- The FTSE 100’s foreign exposure is a source of strength, not weakness, as it reflects the UK’s ability to trade with the world.
Some countries are wide open to cross-border economic activity.
Small, specialised centres for the trading of goods and services--like Hong Kong, Luxembourg and Singapore—regularly record volumes of imports and exports that are three or four times larger than their gross domestic product (GDP).
But larger countries are often inward-looking. Their domestic markets may generate adequate sales and profits and there’s little need to venture abroad for business. The US, for example, has a trade-to-GDP ratio of only 25%. For China, the figure is a little higher, at 37%.[1]
As a medium-sized economy, the UK’s trade-to-GDP ratio is near the global average, at 55%.
But the same can’t be said of the country’s best-known share index, the FTSE 100, which celebrates its 40th anniversary in January 2024.
Over four-fifths of the sales of FTSE 100 constituents now come from outside the UK.[2]
Put another way, the hundred companies that make up the index are substantially more global in outlook than the country in which their shares are listed.
[The FTSE 100 comprises the largest 100 companies, measured by full market capitalisation, with a premium listing on the London Stock Exchange. A premium listing carries high compliance and disclosure requirements.]
Interestingly, the mid-cap FTSE 250 index (which consists of the next 250 premium-listed companies by size from the London Stock Exchange) is more domestically focused. It has an overseas sales ratio that’s close to 55%--about the same as the UK’s overall external trade-to-GDP ratio.
The FTSE 100 index’s heavy weightings in the natural resources (energy and basic materials) sectors mean it is highly exposed to world economic activity.
The index also reacts to changes in the value of the UK currency (if sterling falls, the FTSE 100 often gets a boost as those foreign earnings are suddenly worth more when translated to pounds).
ftse 100 vs ftse 250 industry weights (%)
Source: FTSE Russell as at end of July, 2022. Past performance is no indication of future performance. Please see end for important disclosures.
Should the wide variety of FTSE 100 members—and the far-flung sources of their revenues—surprise us?
Some commentators regard the heavy influence of foreign earnings on the FTSE 100 as equivalent to failing to support the local team—something like flunking the ‘cricket test’, an idea coined by a former Conservative government minister, Norman Tebbit.
You may recall the grumblings of the more chauvinistic sports journalists in the 1990s when the UK premier league started to recruit the best footballers from around the world.
Most people now agree that this influx helped raise the standards of the sport. That, in turn, boosted the fortunes of the English, Scottish and Welsh national teams. So why should the UK share market not turn its gaze outwards?
In fact, it has always done so.
According to economic historian Leslie Hannah[3], London has been a more global and a more open stock market than its competitors for over a century.
“In 1900 more than four thousand companies traded in London, compared with only 200 on the New York Stock Exchange and around 800 in Berlin,” said Hannah.
“In Germany and in America these companies were overwhelmingly domestic. In Britain the majority operated primarily overseas.”
1. Trade openness, 2019 (ourworldindata.org)
2. Source: FTSE Russell, as at September 30 2022.
2. “Pioneering Modern Corporate Governance: A View from London in 1900”, Leslie Hannah, June 2007
Disclaimer
© 2024 London Stock Exchange Group plc and its applicable group undertakings (“LSEG”). LSEG includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) FTSE Fixed Income Europe Limited (“FTSE FI Europe”), (5) FTSE Fixed Income LLC (“FTSE FI”), (6) FTSE (Beijing) Consulting Limited (“WOFE”) (7) Refinitiv Benchmark Services (UK) Limited (“RBSL”), (8) Refinitiv Limited (“RL”) and (9) Beyond Ratings S.A.S. (“BR”). All rights reserved.
FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, WOFE, RBSL, RL, and BR. “FTSE®”, “Russell®”, “FTSE Russell®”, “FTSE4Good®”, “ICB®”, “Refinitiv” , “Beyond Ratings®”, “WMR™” , “FR™” and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of LSEG or their respective licensors and are owned, or used under licence, by FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, WOFE, RBSL, RL or BR. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator. Refinitiv Benchmark Services (UK) Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.
All information is provided for information purposes only. All information and data contained in this publication is obtained by LSEG, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical inaccuracy as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of LSEG nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or LSEG Products, or of results to be obtained from the use of LSEG products, including but not limited to indices, rates, data and analytics, or the fitness or suitability of the LSEG products for any particular purpose to which they might be put. The user of the information assumes the entire risk of any use it may make or permit to be made of the information.
No responsibility or liability can be accepted by any member of LSEG nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any inaccuracy (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of LSEG is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.
No member of LSEG nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing in this document should be taken as constituting financial or investment advice. No member of LSEG nor their respective directors, officers, employees, partners or licensors make any representation regarding the advisability of investing in any asset or whether such investment creates any legal or compliance risks for the investor. A decision to invest in any such asset should not be made in reliance on any information herein. Indices and rates cannot be invested in directly. Inclusion of an asset in an index or rate is not a recommendation to buy, sell or hold that asset nor confirmation that any particular investor may lawfully buy, sell or hold the asset or an index or rate containing the asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.
Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index and/or rate returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index or rate inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index or rate was officially launched. However, back-tested data may reflect the application of the index or rate methodology with the benefit of hindsight, and the historic calculations of an index or rate may change from month to month based on revisions to the underlying economic data used in the calculation of the index or rate.
This document may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of LSEG nor their licensors assume any duty to and do not undertake to update forward-looking assessments.
No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of LSEG. Use and distribution of LSEG data requires a licence from LSEG and/or its licensors.
