The Footsie Turns Forty
The FTSE-100, affectionately known as the Footsie, turned 40 this week. It was launched on 03 January 1984 with an initial value of 1,000. The index is home to Britain’s most monolithic companies such as BP, AstraZeneca, Reckitt, HSBC and Unilever. These companies are mature businesses with significant market share which are highly cash generative and therefore pay handsome dividends. Most of these companies generate the majority of their earnings overseas, which is why they have benefitted from sterling’s steady depreciation against the dollar over time. (Although last year the pound appreciated against the dollar by six cents – its best performance since 2017). In fact, about 80 percent of the revenues of FTSE-100 companies are generated outside Britain.
The index is skewed towards oil and gas, mining, consumer staples, banking, pharmaceuticals, food and housebuilders. The first two sectors have been disfavoured of late by investors which pursue an ESG (environmental, social and governance) agenda. There are very few fast-growing tech stocks of the kind that have boosted the NASDAQ so dramatically.
As a result, the appeal of the FTSE-100 has been more in terms of its dividend yield than its growth potential. The forecast dividend yield for 2024 is 4.2 percent. Consider that the FTSE-100 touched 7,000 on Millenium eve – 31 December 1999 – but closed yesterday at 7,723 having, briefly reached 8,000 on 02 February last year. That represents an annualised return of less than one half of a percent per year over the last 20 years or so. Other leading stock markets, especially the New York markets and those in emerging markets, have exhibited much greater capital appreciation than London in the 21st Century.
On the other hand, on a dividends-reinvested basis, the long-term return on the FTSE-100 comes out at over four percent – a little ahead of most European bourses. In price-earnings terms, the FTSE-100 is trading at a multiple of about 10.5 times. That makes it look cheap (underpriced, if you prefer) as compared to other stock markets. For that reason, predatory foreign companies have been buying up UK businesses. There were 40 takeovers of London-listed companies in 2023 with a total value of £21 billion. An example of that was the acquisition by Mars of Hotel Chocolat last year at a 170 percent premium over market value.
The noughties was a tough decade beginning with the bursting of the dot com bubble (2002) and ending with the fallout from the collapse of Lehman Brothers (September 2008) and the ensuing financial crisis. In fact, the market was down by nearly one third in 2008. The teens was the decade of near-zero interest rates and low growth. Thus far, the 2020s has been the decade of the pandemic followed by perpetual geopolitical crisis.
In contrast, the decade in which the FTSE-100 was born – the 1980s – was that of privatisation (usually with the world “British” to the fore – think British Telecom, British Gas, British Airways), equitization and sustained growth. Although old timers will remember the great crash of 19 October 1987 – “Black Monday”, when the FTSE-100 fell by 11 percent and then by a further 12 percent on the 20th. There has been a lot of churn since those days. Two of those iconic “British” stocks have been subsumed into larger groups.
In the good old days, many of the constituents of the FTSE-100 were conglomerates such as Hanson Trust (built by Sir James Hanson) and GEC (bolted together by Sir Arnold Weinstock). Such convoluted groups have long since been dismantled since they suffered from a conglomerate discount. Shareholder value was unlocked by spinning off individual entities focused on particular product sectors.
And yet the banks have mostly survived. Barclays, Lloyds, Standard Chartered and NatWest were all in the index in January 1984 and remain there today. (Midland Bank was absorbed by HSBC – one of the few newcomers). Legal & General and Prudential are the only insurers which have survived the 40 years, while vintage brand names like Eagle Star have succumbed. The old department store chains – British Home Stores, Great Universal Stores – have all gone, reflecting the carnage on the high street in the internet age.
London is no longer considered a large stock market. Incredibly, one NASDAQ stock – Apple – has a larger market capitalisation than all FTSE-100 stocks combined. Apple is worth $3 trillion (about £2.35 trillion) while the entire FTSE-100 is worth just £2 trillion. Moreover, the number of listed companies on the London markets is in decline. The MSCI UK Small Cap Index, which tracks smaller listed companies, has 20 percent fewer stocks listed than five years ago, while the total value of the index has slumped by 50 percent. The issue is that as companies leave the market they are not being replaced by new initial public offerings (IPOs). This is now a cause for concern in both the City and the Treasury. Sir Martin Sorrell, CEO of advertising agency S4 Capital, warned this week that London risks becoming “a backwater”.
Recent Performance
In its 40-year history, the FTSE-100 has only ended the year lower than it opened in eleven years – 1990, 1994, 2011, 2002, 2003, 2008, 2011, 2014, 2015, 2018 and 2020. The second decade of the 21st Century was when there were the most drawdowns – be it noted under a Conservative government.
One of the best performing FTSE-100 stocks over the last 20 years has been the miner, Rio Tinto, which has risen 20-fold. British American Tobacco (BAT) is up by 1,800 percent over 20 years, despite widespread revulsion for its product amongst the ESG brigade.
In recent years institutional investors, UK pension funds in particular, have drastically reduced their portfolio exposure to UK-listed equities in favour of gilts and overseas equities. In the ‘80s and ‘90s pension funds owned about half the index: now they have just four percent of their assets exposed to it. NEST, which is the UKs largest defined contribution pension scheme by number of members, has less than 0.5 percent of its portfolio allocated to the FTSE-100. This trend has dampened valuations across the market. Another issue is that share sales in the UK, unlike in the USA, attract stamp duty.
This, in turn, has prompted new entrants to suppose that they can obtain better valuations if they list in New York instead of London, as was the case with ARM Holdings, the Cambridge-based chip designer which was floated last year by its then owner SoftBank. Commodities broker Marex announced in early December that it plans to float in New York in 2024. Again, the betting giant Flutter, which owns Paddy Power amongst other brands, is likely to list in New York this month. This follows the decision by Tui Travel to move its principal listing from London to Frankfurt. Pearson, the educational publisher, is also rumoured to be considering the relocation of its listing from London to New York.
The FTSE-250, which spans the 101st to the 350th largest companies on the London Stock Exchange was launched in 1992. There is a multitude of unit trusts and investment trusts which allocate to this index, including funds such as JP Morgan UK Smaller Companies Investment Trust, mentioned by Nick Sudbury here on Wednesday.
Last year, the FTSE-100 posted its third consecutive year of gains, ending its closing session last Friday at 7,733.2 – 3.8 percent up on the 2022 close, most of which uplift occurred in December as interest rate expectations became more favourable. That implied a £71 billion increase in the FTSE-100’s total market cap. The FTSE-250 was up by 4.4 percent on the year.
Outlook
Investor sentiment towards the London market is positive given the general expectation that UK interest rates will come down in 2024, possibly as early as May. This despite the prospect of recession being finely balanced against the likelihood of extremely modest growth. And yet some analysts are optimistic. Car production figures in the UK in November were the highest since 2020. The big supermarket chains enjoyed a bumper Christmas, raking in a record £13.7 billion in sales, according to Kantar. The clothing retailer, Next PLC, is about to announce thumping profits. The UK Purchasing Managers’ Index (PMI) rose to 51.7 in December, indicating a high level of confidence for 2024. In Europe, it fell to 47. UBS expects the Footsie to rise to 8,160 by the end of 2024 while still providing a four percent plus dividend yield.
Stocks to watch on the London market in 2024 include AstraZeneca, the company that pioneered one of the first Covid vaccines during the pandemic. The company is a world leader in immunology treatments for cancer and is one of the UK’s largest companies by market capitalisation. GlaxoSmithKline, another British pharmaceutical giant, is also favoured, having generated vaccines for shingles and respiratory diseases. Also note Relx Group which uses AI to mine legal and medical databases. Not forgetting the UK’s defence champion, BAE Systems, which has just wone a massive contract from the Pentagon and which boasts an order book worth £66 billion.
Rolls Royce, the aero-engine manufacturer was the outstanding London stock market winner of 2023. Its shares tripled in value over the year under the leadership of new CEO Turfan Erginbilgic who set about a programme of cost cutting when he took the helm one year ago. The company has benefited from the post-pandemic boom in air travel. Rolls Royce was actually the top performing stock on the Stoxx-600 index, comfortably outperforming even Denmark’s Novo Nordisk – now Europe’s most valuable company. (Novo Nordisk rode the wave unleashed by its anti-obesity drug – something which I will examine here soon).
Marks and Spencer was also a big winner under Stuart Machin and Archie Norman, respectively CEO and Chairman. Its share price doubled in value over the year; however, at around the 275 pence mark the stock is only getting back to where it was in 2019. All eyes are now on Legal & General where Antonio Simoes, a former director at HSBC and Santander, took control on New Year’s Day.
One possible factor militating against further rises in the London market in 2024 is that expectations of cuts in interest rates have spurred greater interest in bonds which will rise in price as interest rates fall. That may incentivise asset managers to bolster their exposure to gilts and corporate bonds at the expense of their equity portfolios. On the plus side, Britain’s Brexit Blues may seem a thing of the past once 2024 gets going; and a change of government might even pep the markets if Sir Keir Starmer and Rachel Reeves succeed with their City charm offensive.
The really good news for the UK as 2023 came to a close was that the genie of inflation might be put back into its bottle without causing a recession – as seemed likely one year ago. The large number of foreign companies that want to invest in the UK – such as Microsoft which announced a new £2.5 billion data centre in north London last month – suggests a rising level of confidence in the outlook for the British economy.
Comparison With New York
In contrast to London, the S&P-500 was up by 25 percent last year. But if the London markets are considered boring, the New York markets are highly concentrated. About two thirds of the gains on the NASDAQ in 2023 arose because of the prodigious performance of the Magnificent Seven – Alphabet (Google), Amazon, Apple, Meta (Facebook), Microsoft, Nvidia and Tesla. All these stocks climbed by between 50 percent and 240 percent last year. Collectively, they are worth around a mind-boggling $9 trillion. What is remarkable is how young these companies are. Mark Zuckerberg, born in 1984 – the year the FTSE-100 was launched – founded Facebook in 2003.
Part of the obsession with the Magnificent Seven was driven by the hype around the advent of artificial intelligence (AI) in 2023. Yet, in reality, only Microsoft and Google can claim to be AI champions. Nvidia, whose computer chips power AI platforms, was up by 200 percent in 2023. Only a minority of analysts think its shares are vulnerable to a correction in 2024.
The mini-banking crisis that hit the US in the spring when Silicon Valley Bank collapsed seems to have dented the New York markets not at all. The most consequential change of leadership in the American corporate universe in 2024 might be at JP Morgan – the bank with the four trillion dollar balance sheet. Jamie Dimon has presided over this Wall Street giant (though its HQ is no longer in Wall Street, as I explained last October) for 18 years. The bank’s shares rose by 25 percent in 2023. The markets will be watching intently if Mr Dimon steps down.
In Germany, the DAX rose by 20 percent in 2023 – even though Germany is technically in recession. (More on European bourses soon). I wouldn’t expect the Footsie to perform anything like that in 2024; rather I would expect more of the same: another 4-5 percent rise with a four percent yield. Investors could do a lot worse.
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A historical footnote. The first Apple Mac personal computer was also launched in January 1984, although the prevailing view then was that there would never be a computer in every home. It was a huge advance on the Sinclair ZX Spectrum, the 8-bit home computer developed by Sir Clive Sinclair launched in April 1982; and on the BBC Micro which, launched in December 1981, was aimed at schools. It would take another eleven years before people started emailing one another and a little longer before people started to use the internet to book their plane tickets. Social media as we now know it came much later with Facebook (launched February 2004) and Twitter (March 2006).
The digital economy has completely revolutionised the way we live and work since then. It is therefore remarkable that the FTSE-100 has retained such a high degree of continuity in a world transformed.
Listed companies cited in this article which merit analysis:
- AstraZeneca (LON:AZN)
- GlaxoSmithKline (LON:GSK)
- Relx Group (LON:REL)
- BAE Systems (LON:BAE)
- Rolls Royce (LON:RR)
- Marks & Spencer (LON:MKS)
- Legal & General (LON:LGEN)
- Rio Tinto (LON:RIO)