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Trends that shaped FTSE 100 for 21 years
By David Buik | Thu, 22nd December 2016 - 09:00
How times change. It is just 32 years since there were only 30 stocks in the FT Ordinary index, which was formed by Financial News in 1935. The FT 30 was replaced in 1984 by the FTSE 100 (UKX), compiled in association with the Financial Times.
At that time, it was felt that an index of 100 stocks would provide a better barometer not only of domestic economic activity, but also of international business, which was becoming more important to the UK as a result of the abolition of exchange controls in 1981.
Our main index has altered its content in concert with changes in business practices, the political nuances of the day, the significant level of investment from overseas, the dramatic change in taxation in the UK, the mushrooming of hedge fund managers and the gargantuan explosion in parallel derivative products, including options.
UK private investors' share of the stockmarket fell from 20% in 1994 to 11.5% todayThe latter two idiosyncrasies became manifest at the time of the introduction of the "big bang" after 1986, and by the turn of the century turnover was colossal, with both markets very much under a "wet sail".
Interestingly, UK private investors' share of the stockmarket has dropped from 20% in 1994 to about 11.5% today, such has been the influence of overseas investors, and the growth of fund managers, investment trusts and derivatives trading.
The demographics of many constituent companies and their sectors have changed immeasurably since 1984, thanks to mergers and bankruptcies.
How many people remember Hawker Siddeley, Vickers, Plessey, Distillers, General Electric, Dunlop Rubber, FW Woolworth or Associated Portland Cement - a few mainstays from when the FT 30 metamorphosed and expanded into the FTSE 100?
Fair wind for the Footsie
At the close of business in 1995, the year of Interactive Investor's inception, the FTSE 100 closed at 3,689. In May 1997 a Labour government under the ebullient leadership of Tony Blair was formed with a thumping majority of 189.
Labour started well, with good housekeeping and centrist policies that encouraged business, particularly banking, technology, telecoms and media firms. The FTSE rattled up in value to reach its then all-time record of 6,930 on 31 December 1999.
Much of the loss was down to the decimation of tech, telecoms and media firmsIn the process, many of the old die-hard industrial companies mentioned above fell by the wayside, to be replaced in the index by technology companies such as Autonomy, Baltimore, CSR, Freeserve, Logica-CMG, Kingston Communications, Arm Holdings, Bookham and Dimension Data. These companies enjoyed spectacular success leading up to the turn of the century.
However, it became clear that the sector was ludicrously overvalued, and many of them quickly fell from grace - leaving the FTSE 100 - and dissolved into other companies or disappeared altogether. The FTSE 100 fell from 6,930 to a low of 3,656 by 1 February 2003.
Much of the loss was down to the decimation of technology, telecommunications and media firms.
Causes for concern
However, in all fairness, the looming war in Iraq was also a major cause for concern contributing to the collapse of the FTSE in 2003. Autonomy, under the shrewd management of Mike Lynch, was eventually sold, very controversially, to Hewlett Packard in 2011.
Arm Holdings, and latterly Sage Group (SGE), were the only technology companies to survive in our main index. Arm in particular has an international presence as a leading chip maker for mobile phones and computers.
In the late 90s, BT, Vodafone and ITV made huge gains - then lost 40-70% by the end of 2002Much of Arm's success was under the innovative leadership of Warren East - now chief executive at Rolls-Royce. The Cambridge-based "tech-titan" has recently been purchased by Softbank of Japan for £24 billion.
In Germany, the Neuer Markt (new market) disappeared without trace, and in the US the likes of Nortel, Worldcom and Tyco went down, owing billions of dollars. And who could forget Enron?
In the late 1990s BT (BT.A), Vodafone (VOD), ITV (ITV), BSkyB, O2 and Pearson (PSON) made eye-watering gains, but by the end of 2002 they had surrendered between 40% and 70%, as investors rumbled their frothy valuations. Meanwhile, BP (BP.) and Shell (RDSB) became major constituent stocks.
In 2004 Marconi collapsed. The business had been nurtured for years by one of the UK's most celebrated businessmen and philanthropists, Lord Arnold Weinstock. It was eventually destroyed under the watch of Lord George Simpson in one of the largest collapses in UK corporate history.
Chameleon on a roller coaster
The FTSE 100 continued to alter its appearance as a huge slew of flotations went through: BG, BA, Amersham and BT, plus former building societies such as Halifax, Abbey National and Woolwich, some of which were acquired by the main banks.
The All-Share has gained 14% in value, but without QE, it'd likely be at half its current levelThen, of course, the credit crisis struck in 2008/09. March 2009 saw the introduction of quantitative easing (QE), which provided an underwriting platform of confidence for recovery.
It was the staggering performance of banks (virtually trashed out of existence during the credit crisis) and the insurance and mining sectors that underpinned the FTSE 100's gargantuan gains over the following years, reaching a peak in April 2015 of 7,100.
Meanwhile, China's economy grew rapidly, and the mining sector with it, between 2003 and 2011. BHP Billiton (BLT), Anglo-American (AAL), Rio Tinto (RIO), Xstrata and Lonmin (LMI) were key FTSE stocks, and investors made fortunes from them until China started to wobble five years ago.
Since 1996, the FTSE has been a roller coaster ride and changed its appearance like a chameleon. The All-Share index has gained just 14% in value, or about 90% with dividends included. But without QE, its value would probably be half its current level.
David Buik is market commentator at Panmure Gordon
This article was first published in our special publication 21: Twenty-one years of Interactive Investor. Download your digital copy for free here.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser
|BRITISH AMERICAN TOBACCO||4,760.50p||0.56%|
|LLOYDS BANKING GROUP||65.32p||0.90%|
|ROYAL DUTCH SHELL||2,323.00p||0.98%|
|ROLLS ROYCE HOLDINGS||689.50p||-1.85%|
|SAGE GROUP (THE)||642.00p||-0.16%|
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