London’s FTSE 100 Reaches a Milestone, but Faces Challenges

London's FTSE 100 stock index is set to celebrate its 40th birthday this year, but its journey has been far from smooth sailing. Since its launch in January 1984, the blue-chip barometer of the U.K. has endured a challenging path to maturity.

According to Laith Khalaf, head of investment analysis at AJ Bell, the U.K. stock market is currently grappling with an existential crisis. "The headline index has made little progress since the turn of the century, and over the past decade, it has been overshadowed by the U.S. stock market, which has attracted company listings and financial flows," he commented.

However, things looked promising at first. Khalaf examined the data and discovered that during the late 1980s, the Footsie experienced an impressive annualized return of 15.9% in British pounds. Throughout the 1990s, it maintained an annualized return of 11.1%, outperforming the MSCI World's 9.6% and trailing behind the S&P 500's 15.3% gain.

Unfortunately, since the start of the millennium, the Footsie has faced numerous challenges. While all markets struggled following the 2008 financial crisis, the Footsie's performance has lagged behind both the S&P 500 and Europe in the 2010s. It recorded a meager return of 1.6%, compared to the S&P 500's 13.4% and Europe's 4.7%. The situation worsened in the 2020s with the Footsie only rising by 0.5%, in stark contrast to Europe's 5.2% and the S&P 500's 11.5%.

Khalaf attributes this poor performance partly to the Brexit decision in 2016, which led to a decline in new listings, as well as domestic investors shifting away from U.K. equity funds in favor of global options. The absence of major technology companies in the Footsie has also hindered its progress.

Foreign investors have not shown much interest in U.K. equities either, further exacerbating the situation, as per Khalaf's observations.

The Diminishing Relevance of U.K. Stocks on the Global Stage

In recent years, U.K. stocks have experienced a significant decline in their representation in the global developed stock market. According to experts, this decline has reached a point where it is now less than both Apple and Microsoft's individual market shares. In fact, U.K. stocks currently account for only 4% of the global developed stock market, compared to 10% just over a decade ago.

Experts are concerned that this diminishing representation could have serious implications for the U.K.'s relevance on the global stage. As more investors divest from U.K. stocks and fewer fresh funds are invested in them, the country's position becomes increasingly vulnerable, potentially leading to a vicious downward spiral.

Despite these concerns, the FTSE 100, which is comprised of major dividend-paying companies, continues to offer an attractive index yield of 3.97%. This yield is significantly higher than that of the S&P 500, which currently stands at 1.45%. Furthermore, when dividends are reinvested, the annualized return performance of the U.K. blue-chip barometer appears relatively promising.

Currency movements also play a crucial role in evaluating the performance of U.K. stocks. Since the start of the century, the value of the British pound has notably declined against both the U.S. dollar and the euro. While this depreciation benefits FTSE 100 companies with international revenue streams by boosting their share prices, it has an even greater impact on the sterling returns earned by overseas indices due to their substantial exposure to dollars and euros.

Nevertheless, even when adjusting for currency fluctuations and dividends, the FTSE 100 has struggled to generate competitive returns in comparison to other global indices throughout the 2010s and 2020s.

This underperformance can be partly attributed to the rise of growth investing and indexing, which has not been favorable for the U.K. stock market. Particularly, sectors such as banking, insurance, and mining, which primarily constitute the U.K. stock market, have been adversely affected by this trend.

Despite this challenging landscape, some contrarian investors may find the undervalued nature of U.K. stocks appealing, especially when compared to the U.S. market. However, caution and patience are advised as a significant renaissance for the U.K. stock market is unlikely to materialize in the near future.

On Tuesday, the FTSE 100 experienced a minor decline of 0.3%.