What is the FTSE100 and why is it important for the U.K. economy?

by | Jan 13, 2017

Stock markets around the world have been rapidly growing in recent weeks, especially in Europe. The most rapid rise has taken place on one of the London Stock Exchange’s key share indexes – the FTSE100.

The FTSE has been following the upward trend of equity markets in the U.S. and has been consistently hitting record-breaking highs. Take a look at this chart which tracks its performance over the last month: 

Why has it performed well?

A big part of the reason why relates to a weaker Pound Sterling (GBP). After the vote to exit the European Union on the 23rd of June, investors awoke the next day to pandemonium in the markets. There had been stern words from EU friendly politicians, including the Prime Minister David Cameron and top economists from respected institutions, whom forecast large drops in markets and the currency, and if the reaction on June the 24th was anything to go by, they were turning out to be right. The FTSE100 fell by more than 8% on the day after the vote, representing the biggest fall in the index since the 2008 collapse of the US investment bank Lehman Brothers.

Subsequently the Pound plummeted to a 31-year low in value due to market panic, and due to our interconnected world, shares in the U.S. and Asia found themselves on unstable ground too.

Despite the pervading negativity at that time, little did investors and analysts alike realize that a great reversal of fortune for the FTSE100 was going to take place. The drop in the Pound Sterling has arguably acted as a benefit. It seems paradoxical, but when the value of the pound drops, net exports gain. Since many of the companies in the FTSE100 export internationally, indices were bolstered by the sell-off in the pound, as the weak currency boosted earnings of companies with international profits that are now worth more in pounds and pence thanks to sterling’s decline.

The FTSE 100 is comprised of many ‘blue chip’ firms (which is illustrated in our video above) such as HSBC, Royal Dutch Shell, BP, British American Tobacco and many more – all of which make large sums of money overseas.

The slide in sterling means that such earnings are flattered by exchange rates that get reported in pounds and also crucially the firms’ shares are cheaper for overseas investors to buy.

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Risk Disclosure:
Invstr is a technology platform, not a registered broker-dealer or investment adviser. Invstr does not offer its own recommendations of any security or provide its own research to any user regarding any security transaction or order. Brokerage services, including fractional trading of US securities, are provided to Invstr users by DriveWealth LLC, a regulated member of FINRA/SIPC. DriveWealth may not establish investment accounts to residents of certain jurisdictions. For more information, including disclaimers, risk and transaction fees click here. Please note, investing involves risk and investments may lose value. Past performance does not guarantee future results.

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ALL RIGHTS RESERVED © INVSTR LTD. 2017

Risk Disclosure:
Invstr is a technology platform, not a registered broker-dealer or investment adviser. Invstr does not offer its own recommendations of any security or provide its own research to any user regarding any security transaction or order.
Please note, investing involves risk and investments may lose value. Past performance does not guarantee future results.
Brokerage services are provided by the following:
US traded securities, including fractional trading, are provided to Invstr users by DriveWealth LLC, a regulated member of FINRA/SIPC. DriveWealth may not establish investment accounts to residents of certain jurisdictions. For more information, including disclaimers, risk and transaction fees click here.
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