It is normal practice for the financial press, the sell-side community and investors themselves to refer to the FTSE 100 index as a proxy for the performance of the United Kingdom stock market. While all the constituents of the index are indeed members of the London Stock Exchange, they do not necessarily have any connection with the UK economy. Standard Life Investments estimate that over two-thirds of the earnings generated by FTSE 100 companies originate abroad.
One major factor in behind this development is the recent commodity boom and concurrent growth in the number of energy and mineral companies quoted on the London Stock Exchange. Other than the oil companies (some of which have remaining operations in the North Sea), none of these businesses have any exposure to the UK economy. These companies include: African Barrick Gold; Anglo American; Antofagasta; BG; BHP Billiton; BP; Cairn Energy; Essar Energy; Eurasia Natural Resources Corporation; Fresnillo; Kazakhmys; Lonmin; Randgold Resources; Rio Tinto; Royal Dutch Shell; Tullow Oil; Vedanta Resources; and Xstrata.
However, it is not just the basic industries, the index is choc-full of companies which earn the majority of their income from outside the UK. HSBC, Standard Chartered, Old Mutual, Investec, GSK, AstraZeneca, Man Group, Diageo, Imperial Tobacco, BAT, Vodafone, SAB Miller, WPP and Carnival all fall into this category, along with a number of others.
So, which companies in the index are genuinely British? Retailers such as J Sainsbury, Next and WM Morrison; utilities such as Severn Trent and United Utilities; financials such as Admiral Group and Resolution Ltd; property groups British Land and Land Securities; and communications firms BT Group and BSkyB. In summary, not many companies can be identified as being wholly-British with respect to their source of income.
There are a number of implications of this. Firstly, for the financial media, using the FTSE 100 to describe the performance of the “UK stock market”, or even worse, “the UK economy”, is highly misleading given the lack of exposure that the FTSE 100 has to the United Kingdom. Secondly, if investors are committing money to “UK Equity Funds” expecting that their wealth is to be invested into UK companies which are in turn operating primarily in the UK economy, then they may be doing so under false pretences. Could the argument be made that investors are being “mis-sold” if they have invested on one expectation (that they are investing in the UK) when the reality is somewhat different (the underlying companies earn the bulk of their income from abroad)?