What does the FTSE say about UK plc?

Britain's benchmark index may be down by more than 20%. But it's too soon to start talking about a recession.

The FTSE 100, Britain's benchmark equity index, is down more than 20% since its high in April 2015, and investors are increasingly worried that it's signalling a forthcoming recession. But is the FTSE really a good measure of the overall health of the British economy?

Not really, says Samuel Tombs of Pantheon Macroeconomics. Not only is there not a reliable relationship between a bear market in stocks and the arrival of a recession, but the FTSE itself does not mirror the make-up of the UK economy.

For example, oil, natural resources and financial services companies are around 32% of the index. But these sectors accounted for just 8.5% of UK GDP last year, down from 11.3% in 2007. What's more, around three-quarters of total revenues of FTSE companies are generated overseas, so their earnings say little about the health of the domestic corporate sector, notes Tombs.

Hence there's little reason to expect further stock price declines, "which may well happen", to reflect a UK recession, says Linda Yueh on Forbes.com. First, "the hit to the market is coming from largely global, not domestic, factors".

What's more, it's important to bear in mind that stocks are coming down from levels that have been inflated by the glut of cheap cash that central banks dumped on the world even if the UK market "was never as frothy as the American or Chinese ones". The real problem for the UK economy is not sliding shares, but the prospect of a rate rise at a time when debt levels remain high. This is "the real trigger to watch for" but it "is yet to come".

Recommended

The FTSE 100 is set for a makeover with an influx of new tech stocks
UK stockmarkets

The FTSE 100 is set for a makeover with an influx of new tech stocks

The FTSE 100 – the dullest index in the world – is about to reinvent itself as a host of new firms list on the market. The change is long overdue, say…
24 Jan 2021
Think Tesla is a bubble? This might be the best way to bet on it bursting
Oil

Think Tesla is a bubble? This might be the best way to bet on it bursting

The huge rise in Tesla’s share price means that, by market value, it’s now the sixth-largest company in the US and and the world’s biggest car-maker. …
25 Jan 2021
Three clean energy stocks for your portfolio
Share tips

Three clean energy stocks for your portfolio

Professional investor Christian Roessing of the Pictet Clean Energy Fund highlights of his three favourite stocks at the forefront of the clean energy…
25 Jan 2021
The MoneyWeek Podcast: let's talk about bubbles
Stockmarkets

The MoneyWeek Podcast: let's talk about bubbles

Merryn and John talk about the many obvious signs of a bubble in certain assets, including tech stocks, TikTok, and stock-trading 12-year olds. It's c…
22 Jan 2021

Most Popular

The FTSE 100 is set for a makeover with an influx of new tech stocks
UK stockmarkets

The FTSE 100 is set for a makeover with an influx of new tech stocks

The FTSE 100 – the dullest index in the world – is about to reinvent itself as a host of new firms list on the market. The change is long overdue, say…
24 Jan 2021
Think Tesla is a bubble? This might be the best way to bet on it bursting
Oil

Think Tesla is a bubble? This might be the best way to bet on it bursting

The huge rise in Tesla’s share price means that, by market value, it’s now the sixth-largest company in the US and and the world’s biggest car-maker. …
25 Jan 2021
Why we won’t see a house-price crash in 2021
House prices

Why we won’t see a house-price crash in 2021

Lockdown sent house prices berserk as cooped up home-workers fled for bigger properties in the country. And while they won’t rise quite as much this y…
18 Jan 2021