Every day, the BBC – in fact the whole media circus – faithfully report the progress of the FTSE100 share index, as though it were a portent of our economic future. Every day so called “experts” explain in detail the reasons for FTSE100 movements seemingly on the assumption that it still relates to the UK economy. But recently some mystification has been expressed over how, when the UK economy is doing so badly – resolutely refusing to respond to the inspirational George Osborne, even losing its triple A rating – yet the FTSE100 is doing so well, already up 8% this year following 5.8% rise last year, threatening to follow the Dow to hit an all-time high. There is a definite disconnect between FTSE100 share values and the real economy. Bank of England governor Sir Mervyn King’s enthusiasm for quantitative easing only further emphasises that disconnect, boosting share values but having no effect at all on the real economy and jobs.
The FTSE index no longer reflects expectations about the UK economy. So what does it reflect? There must presumably be some connection between share prices and expectations of future gains. But those future profits no longer relate to what’s going on in the UK. The FTSE has become a global index, comprising companies like the dreaded Glencore, Anglo American, Serco, Xstrata, and like global companies. Oil and gas and pharmaceuticals account for nearly 30% of the FTSE’s value. Basic resources (mining), banks and financial services make up another 30+%. And an increasing number of foreign companies find a London quotation beneficial, such as the recent Russian additions, steelmaker Evraz and gold and silver producer Polymetal International. Around two thirds of FTSE100 companies have limited relevance to the real UK economy.
Continue reading The FTSE100 and the UK Economy