Stock market surge bestows victory upon Rachel Reeves for the first time
FTSE 100 Lags Behind Global Indices Amidst Economic Challenges
The FTSE 100, the UK's premier stock market index, has recently reached an all-time high, but it continues to lag behind other major global indices. This disparity can be attributed to several factors, including sector composition, foreign revenue exposure, and economic uncertainties.
The FTSE 100's top sectors - banks, health care, industrial goods, and energy - account for around 50% of its market capitalisation and tend to have slower growth compared to tech-driven markets. In contrast, indices like the US S&P 500, which have seen explosive growth in tech stocks, are heavily weighted towards these faster-growing sectors.
Many FTSE 100 companies earn most of their revenue overseas, providing some global diversification but also exposing them to currency and geopolitical risks. This exposure can dampen returns, as seen in the FTSE 100's underperformance compared to other major indices.
UK shares often offer higher dividend yields but lower capital growth. Over the past 20 years, the FTSE 100 has grown about 70% in price terms, while the S&P 500 has grown over 400%. This difference reflects the market dynamics of slower growth in high-return sectors like tech in the UK.
The recent all-time peak was primarily driven by mining stocks, which can be cyclical and volatile, limiting the potential for a broader sustained rally. Starling Bank, a fast-expanding new business, is one of several companies looking towards Wall Street instead of the City, further highlighting the FTSE 100's struggle to attract faster-growing new companies.
The UK's economic outlook is grim, with retail sales remaining flat and few new jobs being created. Foreign investment has collapsed, and companies are leaving the UK to list their shares in New York instead of London. The CAC-40 in Paris has performed almost as poorly as the FTSE 100.
Investors are increasingly looking elsewhere, as taxes are expected to rise in the UK and the government considers extending windfall taxes on energy companies and banks. The tech-heavy Nasdaq has more than six-folded over the last 25 years, while the S&P 500 has risen fourfold. In contrast, the FTSE 100 is still significantly lower than its peak in December 1999.
To keep pace with its peers, the FTSE 100 should be between 20,000 and 30,000 by now. However, it has taken 25 years for the FTSE 100 to add just another 2,000 points. The FTSE 100 is tied to the British economy, which may continue to struggle in the face of economic challenges and uncertain political landscape.
In conclusion, while the FTSE 100 has reached a new high, its slower growth profile, sector concentration in traditional industries, and sensitivity to global economic and geopolitical factors explain why it often lags behind other major global indices despite occasional peaks. Investors may be better off considering other investment opportunities.
Investing in the FTSE 100 might provide higher dividend yields, given its reliance on sectors that offer slower growth but have a higher return, such as banks, health care, industrial goods, and energy. However, the FTSE 100's continuous lag behind global indices might be due to underperformance in tech-driven markets, the sensitivity to foreign revenue exposure, currency, and geopolitical risks, as well as a struggle to attract faster-growing new businesses in the finance sector.
