The Bull Market Run by Bears: Low Returns and the FTSE

Elliott Vavitsas 

If on the first day of trading in 2010 you had placed £1,000 each in funds tracking the respective major stock indices around the world, you would have found that by now your money had grown the least in the fund tracking the FTSE 100. The FTSE 100 is meant to be the list of tradable shares of the most valuable corporations in the British economy by market capitalisation. It compares in importance to America’s Dow Jones, Germany’s DAX, and Canada’s TSX. Familiar names such as HSBC, Unilever, and AstraZeneca are some of the companies which comprise the index. They are the giants. But, the majority of companies listed are domestic firms with low growth and high market capitalisation that have caused the FTSE 100’s relatively low return.

With this information, one might conclude that the British economy is behind. If its major stock index is growing slowly compared to international competitors, perhaps the whole economy is struggling to grow and remain on par with global trends. However, this cannot be true as the British GDP growth during the same eleven-year period has been similar to other major European economies. Despite challenges coming from Brexit and COVID-19, the economy has maintained its position as the European continent’s second strongest when ranked by nominal GDP. Britain is home to tech start-ups and a flourishing fintech market. The recent IPOs of Deliveroo and Darktrace as well as the potential multi-billion pound upcoming IPOs of Monzo, Starling, and Jaguar Land Rover. It shows that the U.K. stock market is more than just traditional banks, retail giants, and large pharmaceutical companies. This is without considering the recent Special Acquisition Company (SPAC) boom that has taken hold of all major exchanges around the world.

If the portrait of the U.K. economy is much more dynamic than we think, why is this not reflected in the FTSE 100? The FTSE 100 works by including the top 100 stocks by market capitalisation. The higher the market capitalisation, the more weight a corporation has on the movements of the index as a whole. Herein lies the problem with the FTSE. The highest market capitalisation companies are slow-growing and stagnant companies. This delivers underachieving growth for the index as a whole. 

There are two potential solutions. Expanding the index to include the first to 200th ranked companies would add more growth to contribute to the value of the index. It would also allow for one to two billion pound IPOs and SPAC deals to occur on the flagship index. 

Alternatively, the FTSE could become smaller—the “FTSE 50.” Fewer stocks listed on the index would allow multinational U.K. companies to keep their place at the top while excluding declining domestic corporations. To ensure younger and faster growing companies are included, quarterly returns on investment should be prioritised equally to market capitalisation. Equal prioritisation would prevent volatility to keep investor confidence in the index.

Overall, anyone putting money into the stock market does so to grow their investment. The FTSE 100 is slowly becoming less and less effective and needs a reform to more accurately  reflect the U.K. economy and help British investors ‘win’ as much as their international peers.

Sources:

https://markets.businessinsider.com/indices

https://www.statista.com/statistics/685925/gdp-of-european-countries/

https://www.pwc.com/us/en/services/deals/blog/spac-boom.html