The FTSE 100 Is At The Mercy Of The Next Global Shock

The FTSE 100 (FTSEINDICES: ^FTSE) is nominally an index of the top 100 UK stocks and shares, but it’s nowhere near as British as most people think.

It may feature familiar names such as BP, Tesco, J Sainsbury, BSkyB, William Hill, Vodafone Group and Marks & Spencer Group, but the index is truly a global barometer.

Astonishingly, FTSE 100 companies generate a mighty 77% of their earnings overseas. 

That means the index is taking the temperature of the global economy, rather than the just the UK. And the world is looking a bit feverish right now.

Foreign Fields

The UK economy is almost irrelevant to the FTSE 100. As the UK’s growth prospects have been steadily upgraded this year, with house prices, employment and sentiment rising at a breakneck pace, the FTSE 100 hasn’t blinked.

It doesn’t even care.

Its eyes are now primarily focused on foreign shores. And they look rather more fragile.

Global Income, Global Danger

Who cares if the UK is now the fastest-growing economy in the OECD when Europe, the Middle East, Latin America and other emerging territories are losing their way?

That’s what the FTSE 100 really cares about, and with good reason.

London-listed mining giant Rio Tinto earns 99% of its revenues overseas, BHP Billiton earns 97%. Brewing giant SABMiller, insurer Standard Life, pharmaceutical companies AstraZeneca, GlaxoSmithKline and Shire, and healthcare equipment specialist Smith & Nephew all generate well over 90% of their revenues abroad.

The FTSE Isn’t Crying over Argentina

The FTSE 100 is big enough and tough enough to shrug off minor international shocks such as the Argentina default. 

The awfulness of events in Iraq, Syria and Gaza has only caused minor flutters, at least so far.

But there are some shocks it won’t be able to brush off.

Oil Shock Horror

If ISIS militants were able to strike at Iraqi oil facilities, which are mostly in the Shia-dominated south of the country, the FTSE 100 would definitely sit up and take notice.

An oil price shock would certainly make the index shudder, perhaps more than any other single event. When oil peaked at $146 a barrel in July 2008, it arguably triggered that autumn’s market collapse.

War is always a worry, and the FTSE 100 was down more than 1% on Wednesday morning, as a build-up of Russian forces sparked fears that Vladimir Putin’s tanks were set to invade the Ukraine.

The FTSE 100 Is In The Eurozone

China is just one shock away from a full-blown financial crisis, according to a new warning them Fathom Consulting, run by former Bank of England policymakers.

It compares the build up of credit risk in China to America in 2006, before the credit crunch struck.

A credit event in the world’s second-biggest economy would definitely blow a hole in the FTSE 100. As would a eurozone meltdown. 

The UK never joined the euro, but that will make no difference to the FTSE 100.

We Are The World

The UK is growing strongly, but at today’s level of 6600, the FTSE 100 is now 4% below its year-high of 6878.

Today’s global worries mean that the index is cheaper than it was, which gives investors the chance to buy in at just 13.5 times earnings, below the 15 times p/e often seen as fair value.

You can also lock into a yield of 3.5%, far more than you can get on cash.

The FTSE 100 has the world at its feet. Right now, it’s a world of worry. But that also offers an opportunity for brave buyers.

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Harvey Jones has no position in any shares mentioned. The Motley Fool owns shares in Tesco.