IMPLICATIONS OF FTSE 100 CLOSING AT A RECORD HIGH IN 2017
FTSE 100 closed at a record high of 7687.77 on the last working day of the year – Friday, 29th Dec 2017. This is a 7.6% increase as compared to last year’s closing index of 7142. In order to fully understand the implications of the record high index of FTSE 100, it is important to understand few things about the blue chip index first.
Constituents of FTSE 100
FTSE is short for Financial Times Stock Exchange. Though FTSE started as a joint venture between Financial Times and London stock exchange, it is now being maintained by the FTSE trading group which is a fully owned subsidiary of London stock exchange. It lists 100 most powerful UK companies. Some of the companies listed on this index are HSBC holdings, Vodafone group, British Petroleum, Royal Dutch shell and so on. It is important to note that all the companies are multinationals that do substantial amount of business overseas.
Calculation of FTSE index
The FTSE index is calculated on the basis of market capitalisation of the listed companies. Market capitalisation of a company is calculated as the product of its current share price with the total number of shares owned by the company. Hence, a company whose market capitalisation is huge will have a bigger impact on the FTSE index than a company whose market capitalisation is less. This means that even a small change in the share price of the top five companies listed on FTSE would result in a bigger change in the FTSE index.
Implication of FTSE index changes
First and foremost FTSE 100 is not a fair indicator of the UK economy in general. In order to understand the workings of the English economy it would be wise to look at the FTSE 250 index which constitutes the next 250 companies in line which have more local flavour. The reason behind this is that since most of the companies listed on FTSE 100 are multinationals and conduct a lot of business across the United Kingdom they would not reflect the true state of the UK market. In fact a sluggish pound would result in better profits for these companies as they deal in stronger foreign currencies.
It is clear now that the record high does not mean a bolstering UK economy.In fact the UK economy is currently witnessing a slow down with housing rates decreasing and the GDP growing at a snail’s pace.
Reasons for the record high FTSE 100
The record high of the FTSE is then attributed to the overall good economic growth of the USA and the Euro zone countries. This is definitely good news for FTSE 100 companies. Another reason for high FTSE index could be the rising oil prices. Since many oil and gas companies are listed on FTSE 100, increase in their share price would result in an increase in FTSE index. Another major reason for the rise in index is the rise in copper prices. This has led to an increase in the stock prices of the mining companies listed on the FTSE 100 like Rio Tinto, Antofagasta, BHP and Glencore.
Whatever might be the reasons for the increase in the index it has certainly helped bring the year to a close on a positive note with greater expectations for year 2018.