Interactive Investor

FTSE 100 at 40: fighting fit or feeling friendless?

As the UK’s blue-chip stock market index celebrates 40 years since its launch on 3 January 1984, ii’s head of markets studies performance and how much there is for investors to cheer.  

3rd January 2024 09:30

Richard Hunter from interactive investor

    It is often mentioned that the previous record closing high of 6,930 in 1999 around the time of the dot.com frenzy was only eclipsed in 2015. It wasn’t until February 2023 that the FTSE100 passed the 8,000 barrier for the first time. On the face of it, that is a paltry return in terms of the index number itself.

    It is also only part of the story. The index is reshuffled on a quarterly basis, usually resulting in two or three stocks being relegated and replaced by stocks from the FTSE 250. As such, the share price return in isolation is something of an apples and pears comparison between 1999 and 2023.

    Rather more importantly this does not include the power of compounding, or reinvesting dividends. The UK has traditionally been a generous payer of dividends, and when these are taken into account the figures are startling. Since the turn of the century, the “simple” return - this only considers the index level - on the FTSE 100 is around 12%. However, with dividends reinvested, the total return leaps to 163%.

    The power of compounding is even more compelling over greater periods of time, such as going back to 1984 when the index was launched. An investment of £1,000 would now be worth £7,700 on a simple return basis, but over £22,500 in total returns. The importance of a longer-term investment time horizon and the benefits of compounding are plain to see.

    UK stocks are out of favour

    That said, there is little doubt that the index is currently out of favour with both institutional and overseas investors, propelled by a negative reaction to Brexit from which the UK as an investment destination has failed to recover.

    In a time of excitement in high growth stocks, particularly US technology shares where the potential for artificial intelligence (AI) has led the so-called “Magnificent Seven” to stellar returns, especially last year, the FTSE 100’s lack of obvious exposure to the tech sector has been a hindrance.

    Investors chasing growth have eschewed the UK’s premier index, since its constituents are seen as being past the growth phase. While rather more dependable, cash generative and stable, many of its companies are seen to represent the “old economy” with potential for little more than pedestrian growth.

    This can have its advantages, however. 2022 was a tough year for markets, and the likes of the S&P500 and Nasdaq fell by 19.5% and 33.1% respectively. Given its defensive qualities, however, the FTSE 100 eked out a gain of 0.9% for the year, outperforming many of its global peers by a considerable margin. By the same token, last year was a rather different time as investors sought growth once more. The S&P500 added 24.2% and the Nasdaq 43.4%, while the FTSE 100 managed a gain of just 3.8%.

    In terms of valuation, the index is cheap by historic standards to itself, let alone its global peers. Whereas the FTSE 100 trades on around 10 times forecast earnings, the world index is valued at around 19 times and the S&P500 at around 21 times.

    FTSE 100 at an inflection point

    For many, the index is at something of an inflection point. Undoubtedly cheap, but without the propulsion of technology shares. Well regarded, regulated and respected, yet unable to attract new companies which are more highly valued among larger pools of capital elsewhere. There are rumours that the market may undergo some regulatory reform which could improve new listing prospects, but as yet without any firm details.

    As it currently stands, the index runs the risk of mature companies – admittedly providing stable returns – holding back the index given the lack of true growth potential.

    The index has changed significantly since 1984 (the list of original constituents at the bottom of this article demonstrates by how much), and it will likely look very different in another 40 years’ time. But it will need a seismic shift to protect its long-term future.

    The global economy continues to evolve through technology generally, and perhaps AI in particular. There are also positive implications for companies which can contribute to combatting climate change, sustainable products and changing consumer trends. So the challenges for UK firms must be faced head on. Part of this change is arguably already in train, with an estimated 75% of earnings coming from overseas, thus reflecting and benefiting from global progress.

    In terms of the sectors in which the top UK companies actually operate, however, it may be that the very constituents of the premier index evolve to reflect a new, dynamic and ever-changing global environment.

     

    FT-SE 100 Share Index original constituents

    1

    Allied - Lyons

    2

    Associated British Foods

    3

    Associated Dairies Group

    4

    Barclays Bank

    5

    Barratt Developments

    6

    Bass

    7

    BAT Industries

    8

    Beecham Group

    9

    S&W Berisford

    10

    BICC

    11

    Blue Circle Industries

    12

    BOC Group

    13

    Boots Co

    14

    Bowater Corporation

    15

    BPB Industries

    16

    British & Commonwealth

    17

    British Aerospace

    18

    British Electric Traction Company

    19

    British Home Stores

    20

    British Petroleum

    21

    Britoil

    22

    BTR

    23

    Burton Group

    24

    Cable & Wireless

    25

    Cadbury Schweppes

    26

    Commercial Union Assurance

    27

    Consolidated Gold Fields

    28

    Courtaulds

    29

    Dalgety

    30

    Distillers Co.

    31

    Eagle Star

    32

    Edinburgh Investment Trust

    33

    English China Clays

    34

    Exco International

    35

    Ferranti

    36

    Fisons

    37

    General Accident Fire & Life

    38

    General Electric

    39

    Glaxo Holdings

    40

    Globe Investment Trust

    41

    Grand Metropolitan

    42

    Great Universal Stores 'A'

    43

    Guardian Royal Exchange

    44

    Guest Keen & Nettlefolds

    45

    Hambro Life Assurance

    46

    Hammerson Prop Inv & Dev

    47

    Hanson Trust

    48

    Harrisons & Crossfield

    49

    Hawker Siddeley Group

    50

    House of Fraser

    51

    Imperial Chemical Industries

    52

    Imperial Continental Gas Association

    53

    Imperial Group

    54

    Johnson Matthey

    55

    Ladbroke Group

    56

    Land Securities

    57

    Legal & General Group

    58

    Lloyds Bank

    59

    Magnet & Southerns

    60

    MEPC

    61

    MFI Furniture Group

    62

    Marks & Spencer

    63

    Midland Bank

    64

    National Westminster Bank

    65

    Northern Foods

    66

    P & O Steam Navigation Co

    67

    Pearson (S.) & Son

    68

    Pilkington Brothers

    69

    Plessey Co

    70

    Prudential Corporation

    71

    RMC Group

    72

    Racal Electronics

    73

    Rank Organisation

    74

    Reckitt & Colman

    75

    Redland

    76

    Reed International

    77

    Rio Tinto - Zinc Corporation

    78

    Rowntree Mackintosh

    79

    Royal Bank of Scotland Group

    80

    Royal Insurance

    81

    Sainsbury (J.)

    82

    Scottish & Newcastle Breweries

    83

    Sears Holdings

    84

    Sedgwick Group

    85

    Shell Transport and Trading

    86

    Smith & Nephew Associated Co's.

    87

    Standard Chartered Bank

    88

    Standard Telephones & Cables

    89

    Sun Alliance & London Insurance

    90

    Sun Life Assurance Society

    91

    THORN EMI

    92

    Tarmac

    93

    Tesco

    94

    Trafalgar House

    95

    Trusthouse Forte

    96

    Ultramar

    97

    Unilever

    98

    United Biscuits

    99

    Whitbread & Co 'A'

    100

    Wimpey (George)

    These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

    Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.