After an encouraging start to 2023, the FTSE 100 index has fallen back from its February high. Indeed, it has since become one of the worst-performing indexes among major stock markets. So what’s gone wrong for the Footsie?
The faltering FTSE 100
Here’s how the index has performed against global peers (sorted from highest to lowest returns in 2023):
| Index | YTD 2023 | One year | Five years |
| Nasdaq Composite | 29.7% | 21.4% | 80.7% |
| Nikkei 225 | 27.4% | 25.9% | 52.5% |
| S&P 500 | 14.2% | 14.8% | 61.3% |
| STOXX Europe 600 | 7.5% | 10.5% | 20.2% |
| FTSE 100 | 0.3% | 2.2% | -2.2% |
The Footsie has eked out tiny positive returns in 2023 and over 12 months. However, it is the only index to have recorded a negative return over any of these timescales.
Even the second-worst performer — the STOXX Europe 600 index — has thrashed the FTSE 100 over these periods. Meanwhile, both US indexes and the Japanese index are streets ahead of the UK market.
Crucially, the above figures exclude dividends — a major component of the FTSE 100’s long-term returns. The Footsie’s one-year return of 2.2% almost triples to 6% after adding these payouts.
Why is the Footsie flagging?
Note that foreign investors now own more than half of UK-listed shares. With the pound among the best-performing major currencies in 2023, these shareholders have seen returns boosted in their home currencies.
Meanwhile, as some home-grown investors lose patience with UK stocks, many prefer to invest in exciting US growth and tech stocks. In comparison, the ‘old economy’ FTSE 100 looks boring.
Here are six reasons why the Footsie is unloved, unwanted, and overlooked:
1. Brexit
The 2016 vote to leave the European Union means that some UK firms are now being cut off from European supply chains. EU firms prefer to deal with fellow EU firms, rather than tackle the extra bureaucracy of dealing with UK businesses. This has reduced trade between the two blocs, hitting company revenues and earnings.
2. Unloved sectors
The FTSE 100 index is packed with ‘old fashioned, boring’ companies such as banks and insurance companies, oil & gas producers, miners, housebuilders, utility groups, tobacco companies, etc.
With interest rates and consumer inflation soaring since December 2021, many businesses have been hit hard. Also, a lack of large-cap tech stocks means that the Footsie has missed out on the AI (artificial intelligence) hype that has sent US and other stocks racing ahead.
3. Falling oil price
The price of Brent crude has fallen by almost a tenth (-9.5%) in 2023. With two oil & gas supermajors among the Footsie’s top-five biggest players, this decline has negatively affected the index.
4. A weakening economy
One factor really hurting the UK economy is stubbornly high inflation. Rising consumer prices have put huge strain on household budgets, as have sky-high energy bills. This has hit consumer spending, hurting certain companies and sectors.
5. Political risk
2022 and 2023 have been volatile years in British politics. During this time, we have had four prime ministers, three chancellors, and two monarchs. Also, Liz Truss’s short-lived government badly damaged perception of the government’s economic competence. Why invest in unstable regimes (and their stocks and bonds), when safer bets can be found elsewhere?
6. Pension funds sell out
In the late 1990s, UK pension funds and insurance companies owned more than half of UK stocks. Over the past 25 years, these asset managers have de-risked by selling stocks to buy safer bonds. Hence, their ownership of UK stocks has crashed to 4% today.
In summary, the FTSE 100 has missed out by miles on the rally in global stocks. But this has left it incredibly cheap, both in historic and geographical terms. And that’s why I keep on buying cheap UK shares!
