Bet on the FTSE for a global recovery

The FTSE is not a barometer of Britain’s economy but a barometer of the world

New research from the UK’s leading financial website, The Motley Fool – Fool.co.uk, reveals that the UK is relatively insignificant when it comes to the profits generated by companies in the FTSE 100 ⁽¹⁾.

• Half of all FTSE 100 companies generate negligible profits from the UK

• 83% of FTSE company profits are generated outside the UK

• FTSE firms make more profit in both Europe and the US than in the UK

The romantic notion that the FTSE 100 index is a barometer of the UK is about as outdated as City gents wearing bowler hats. The FTSE 100 index is today a rich, cosmopolitan index that boasts a host of multi-national corporations.

Notable non-British companies include Chilean miner Antofagasta, Anglo-Dutch oil company Royal Dutch Shell, British cigarette manufacturer British American Tobacco (which does not sell any of its brands in the UK), and Anglo-Swedish pharmaceutical company AstraZeneca.

Over £120 billion of the £144 billion of profits made by blue chip companies last year came from outside of the UK. Some FTSE 100 companies even consider the UK so minor as to classify profits generated in Britain under the Rest of the World.

Australian miner BHP Billiton and Cairn Energy, which generates almost all its profits in India, highlight the irrelevance of the UK economy on their respective performances. None of their profits are generated from the UK. Others include African insurer Old Mutual and overseas banker Standard Chartered.

The unimportance of the UK economy to FTSE companies may go some way to explain the poor correlation between the blue chip index and the UK’s Gross Domestic Product. In the 1990 recession, the FTSE 100 index climbed 10% while the UK economy shrank 3% ⁽²⁾.

There is a similar detachment between the performance of FTSE 100 index and the UK economy today. Between the last quarter of 2008 and the third quarter of 2009 when the UK economy contracted 5%, the FTSE 100 index rose 18% ⁽³⁾.

David Kuo, Director at the Motley Fool, says: “It is easy to assume a correlation between the FTSE 100 index and the UK economy. But things are not always what they seem.

“The UK stock market is merely a convenient place for companies to raise capital. Why else would a Kazakhstani miner seek a stock market listing in the UK? It’s certainly not because of our love of Borat. However, London may lose its attraction if increased Government regulation and increased taxes become a burden for growth.

“Until then, though, investors who are betting on a global recovery can easily do so by exploiting the geographic diversity of the FTSE 100 index. The UK economy may struggle to recover from recession but it it’s unlikely to hold back the FTSE.”

-ENDS-

For further information and/or to arrange an interview with David Kuo, please contact: Sonia Rehill on 020 7025 8576 or soniar@fool.co.uk

An ISDN line is available for radio interviews

Notes to Editors:

1) Source of income by geographic region (www.companyrefs.co.uk)

2) Performance of the FTSE 100 index during the 1990 recession

3) Performance of the FTSE 100 index during the 2008 recession

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