So the old saying went, if the US catches a cold the UK catches full blown man flu – or something similar to that! The reverse was also thought to be true. Take a look at the chart below because it really is quite phenomenal. At the beginning of 2012 the old relationship between the FTSE 100 & S&P 500 completely broke down. The S&P shot up rising 40%, the UK went up around 10 percentage points and is now back to where it started.
If you believe that stock markets and these are bell weather markets, have any correlation to real life economics then this is truly an amazing shift as it is telling us that something fundamental is going on. Alternatively the FTSE 100 is no longer representative of the UK and although we know it is an international index these days, ie some 50% of earnings are USD based and from overseas earnings, the questions is what does the FTSE 100 represent?
Sure, part of this divergence in performance between S&P 500 & FTSE 100 can be explained by the FTSE’s heavy dependence on Oil & Gas, commodities and a handful of other sectors such as supermarkets and banks, all of which have been in the doldrums. The FTSE 250 on the other hand has outperformed and that index is far more domestically orientated that the FTSE 100 so perhaps the old relationship between the US & UK has not changed so much.
There are some fundamental questions to be asked as to the relevance of the FTSE 100. Particularly for private client portfolio managers. If the FTSE 100 is no longer representative of UK plc then portfolio managers need to start looking at other indices. Pensions funds & some institutional investors have been doing it for some time. It could well be that UK investors are enormously over exposed to the FTSE 100 and not getting the expsoure and asset allocation they should be. Should PM’s be looking to cross boarder indices eg MSCI world? What does this mean for FX exposure. Are UK domestic investors missing out on global growth themes? What does this all mean for risk? Essentially is following the FTSE 100 relevant any more?
FTSE sometime ago decided it was ok to let in poorly managed mining companies such as Kazakhmys and back in 2000 there were Baltimore and the like. Since then the index has become less and less relevant to domestic UK investors and it is becoming difficult to work out what exactly the FTSE 100 does give exposure to. I think it is time to have a re-think. Also the quarterly reviews may need to be lengthened. 3 months is too short with stocks coming in and out of the index far too regularly.
It is an important question because billions of pounds of capital is invested on the back of these indices and certainly for UK plc it is important that capital is allocated effectively. For private investors it is also imperative that they are actually getting the exposure they and portfolio managers want them to be getting.