Let’s Look At The FTSE 100

Let’s Look At The FTSE 100

Most people probably believe that the FTSE 100 is a reflection of how well the UK economy is doing, but in fact, FTSE 100 performance is driven by just a few parts of the global economy, as opposed to being diversified across multiple sectors and companies.

Also, the larger the company in the FTSE 100 is, the greater the impact it will have on performance.

These were the top 10 FTSE 100 companies as at the end of 1st quarter of 2019:

Source: DTSE Russell Publication. Index Weights as at closing 29th March 2019

So, just 10 stocks drive almost half the performance of the FTSE 100, dominated by 3 sectors; oil & gas, healthcare, and banks.

Most of their earnings are generated outside of the UK, so any downturn in the UK economy will have little impact on their potential earnings.

Arguably, the only stock reliant on the UK economy is Lloyds group, however, banks have been restoring their balance sheets since 2009, and so would be better placed to deal with a downturn.

Investors in the FTSE 100 need to understand what they are actually buying. For those who want greater exposure to the UK economy, the FTSE 250 or small-cap index could be considered, as they have more companies whose earnings are affected by the UK economy.

If you are worried about a no-deal BREXIT and your UK equity exposure in the short term, then investing in FTSE 100 companies could provide some protection, due to the positive impact a falling pound will have on global company earnings – this should then boost the overall performance of the index.

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