Dan AtkinsonThirty-five years old and going strong, the FTSE 100 index has become one of the world’s great share-price benchmarks and is synonymous with the London stock market.
The FTSE 100 latest news is ever-present in financial reports, the FTSE 100 trend is poured over by analysts and commentators and, half-way through the year, many are keen to find out how FTSE 100 forecasts 2019 are working out.
Any FTSE 100 analysis of the last 12 months would show a sort-of jagged saucepan pattern, starting with 7,676.28 on 18 July 2018, declining to a 12-monthly low of 6,584.68 on 27 December and recovering somewhat to 7,535.46 on 17 July this year.
The FTSE: a history lesson
Where do we go from here? Well, any successful FTSE 100 forecast would have to take into account the very many different factors that drive movements in the level of the index.
More on that in a moment.
First, what is the FTSE 100 and what is it supposed to do?
The FTSE 100 was launched in January 1984 and was intended to supersede the venerable FT 30 Index, which dated back to 1935.
The “FT” stands for Financial Times, the British business newspaper. It is no longer involved in the FTSE 100, as the second part of its title – “SE” stands for Stock Exchange – is now fully in charge, and manages the index and other indices through a subsidiary, FTSE Group.
The FTSE 100 was to be a broader index than the FT 30, and thus better represent the mood of the market, although some traditionalists argued that the FT 30 gave a better reading in this regard, pointing out that the Dow Jones index had (and still does) confined itself to 30 stocks.
Before long, it was known simply as the “Footsie” although, again, some traditionalists resisted what they saw as a trivialisation of an important piece of infrastructure, given that “footsie” is a game played under the table by British children.
Great names of yesteryear
At the time, the FTSE 100 seemed bound up with other exciting, albeit sometimes nerve-wracking changes in the City of London, including the “Big Bang” reforms of 1986, which swept away previous barriers to entering the market, and the (later cancelled) new, high-tech share-registration system TAURUS.
Looking back from the present, however, and the composition of the original FTSE is redolent of another era. Its member-companies were overwhelmingly British, albeit many had international operations, and contained a roll call of household names familiar to everyone in the country: Bass the brewer; Cadbury Schweppes, in chocolate and soft drinks; Rank Organisation, the leisure group; Thorn EMI in consumer electronics; Hawker Siddeley, the engineer revered for its role in building strike aircraft such as the wartime Hurricane; Trusthouse Forte, running hotel and restaurant chains beloved of millions of British families, and the grand retailer House of Fraser.
Less part of an exciting new future, more a roll call of Britain’s commercial yesteryear. None still feature in the index.
And this takes us to the first key factor to bear in mind when trying to figure out where the FTSE could be heading, which is that this is a very international index. It may be based in London but there is, in truth, little distinctly British about it. About 70% of FTSE member-companies’ earnings come from abroad.
So, for example, a sharp decline in the value of the pound is not simply good news in the sense that exporters will be able to sell more. This would have been the case even with a domestically-focused index and anyway would have been partly cancelled out by a rise in costs for firms importing raw materials.
For FTSE shareholders, the bonus is that those overseas earnings will be worth more when repatriated into devalued pounds.
More broadly, FTSE 100 predictions 2019 need to take account of the fact that a global index is affected by global developments. Gone are the days when an election victory for the Conservative Party would have the FTSE jumping for joy, prompting headlines of the “Thanks a billion!” variety.
Don’t try counting
Today, trouble in the Persian Gulf, political deadlock in Washington, a crisis in the euro-zone, tensions between Russia and the west – these and a myriad of other happenings are capable of prompting sharp movements in the prices of FTSE stocks.
But remember also that this is a very diverse index. So, Middle East trouble would be significant for BP and Royal Dutch Shell, but perhaps rather less so for UK housebuilders Barratt Developments and Persimmon.
Similarly, regulatory changes or major lawsuits in the health field would be of more importance to GlaxoSmithKline than to telecoms operator BT Group.
That said, there are happenings that would impact the FTSE, positively or negatively, as a whole. Obvious examples would include the beginning or end of a war or economic crisis, the resolution of a major political crisis or the signing of a global trade deal.
So, how you forecast the FTSE’s performance during the rest of the year depends on how you see the big themes developing: a US-Iran war, or not; continued trade tensions with China, or their easing; resolution to Europe’s assorted problems, including Brexit, or their intensification.
Finally, two key points, applicable to most index investment or trading, should be remembered. One is that, for all the talk about “efficient markets” finding the “right price”, indices can turn abruptly. By Friday 23 October 1987, the FTSE had lost a quarter of its value since “Black Monday” at the start of the week.
Which of those two price levels was “right”?
And to buy into any index any time is to put your money on all the “bets” everyone else has made right up to the moment you arrived. They may have had great judgment, or perhaps not.
Oh, and don’t try to count the companies in the FTSE 100, because you’ll get only as far as 99. Royal Dutch Shell lists two types of stock.
Image source: antb / Shutterstock.com
