laneclarktpp
12 months ago
Is the FTSE 100 the most undervalued global stock market, or stale and outdated?
You probably heard that the FTSE 100 was 40 years old last week. The first ever trading day of the UK’s major benchmark was 3rd January 1984. It would be nice to be able to celebrate it, but after a solid first 20 years, the last 20 have been rather disappointing. Maybe life begins again at 40.
Firstly, note that it makes most of its money outside the UK – about 75% in fact, 25% of which is in the US so it is susceptible to currency moves and the global economy, not just the UK economy.
Its composition is ‘old fashioned’ offering something of a history hit (the likes of BP Plc and Shell Plc have been in it since it launched). The main weightings are towards Banks, oil and tobacco, with very little tech.
However, these defensive stocks pay high dividends. This means it generates income, rather than growth (tech) stocks which focus on rising share prices but pay out little in cash.
FTSE dividends hit a record high in 2023 with an estimated yield of 3.9% which is expected to rise to 4.2% in 2024. This is attractive when more volatile high-growth stocks are under pressure (as we would expect this year).
Its 40-year annualised returns lag both those in the US and Europe (5.2% in the UK vs. 9.1% and 7.8%, respectively, says financial company AJ Bell), and it has only just beaten Japan (4.6%). That’s hall-of-shame stuff.
The index has underperformed for most of the current century and there have now been 30 consecutive months of outflows from UK funds, (says investment bank Peel Hunt), something that is endlessly self-reinforcing: The more outflows there are, the worse the market looks and the more unpopular it becomes.
The UK index was doing fine during its infancy and adolescence. In the latter years of the 1980s, it lagged the rest of Europe but beat the US(hard to imagine but it’s true). In the ‘90s, it lagged the US but beat Europe and Japan.
After the dotcom bubble burst, it matched its peers, almost halving between 1st Jan 2000 and 1st Jan 2003 and then rebounding back towards the end of 2007. But that’s where it diverged.
Across the 2010s and the 2020s (up until the end of2023, at least), it was the worst performing index out of that peer group. As a sterling investor, you’d have been better off investing in the US, Japan or Europe.
In 2008, we had the financial crash and it would appear that this sadly broke the back of the financial epicentre that is London.Even though the sub-prime was more of a US issue than a UK issue, as is often the case, the UK still hasn’t really bounced back from that one.
London, of course, is still a global financial capital. These days we can scarcely bring ourselves to admit that in 2007, London was arguably (with New York) the centre of world finance.
So if 2008 was a global financial bubble, it was also a UK bubble, or more specifically, a London bubble.
The problems didn’t begin in 2008 but during the years before as the London hype began. At least a chunk of that apparent statistical prosperity was false.
The financial bubble subsequently burst. If that was the only issue, the UK might not stand out so much. After all, the US was also at the heart of the global finance bubble and Europe went on to have the sovereign debt crisis — which seems to have been forgotten by everyone but me. It has gotten a lot worse, and I predict that this comes back to the forefront of market focus within the next 2 years.
But the collapse in interest rates to zero also had another effect on the UK. The UK’s corporate pension deficits exploded over the period, because the value of their future (theoretical) liabilities soared.
This not only meant that companies had to divert real cash money into increased pension contributions, but the crash also increased the appetite for “safe” assets — ie UK government bonds — to ensure that companies would meet their future obligations to a lot of former employees with defined benefit pensions.
Brexit in 2016 was something of a cherry on the cake. That cratered sterling and sent the UK into a lengthy period of political chaos, one which gave global asset managers all the excuse they needed to put the country in the “too hard” pile.
So what does the FTSE 100 have to look forward to at 40? Is there any hope for a new lease of life? Or is it all even further downhill from here?
Firstly, it’s cheap. No one really seriously denies that. the market is at the bottom of its 30-year range on pretty much any valuation measure you care to mention. But it isn’t just cheap in absolute terms; it’s cheap relative to the rest of the world, and cheap even when you take our old-fashioned sectoral mix into account (a discount of 19%).
It may stay cheap though — perhaps the high dividend payments from the FTSE 100 are a sign that the companies concerned see no growth prospects ahead and nothing else to invest the cash in.
But the right way to look at it is probably to say that it comes with a lower level of long-term capital risk than more expensive markets, that sentiment toward markets and hence the flows into them can turn on a sixpence — look at Japan, which, having been loathed for decades, is now up an annualized 10.6% in local currency terms since 2020.
All of the negative trends mentioned above have either run their course or are past their peak. The most disruptive bit of Brexit is done. Political instability will always exist but the UK is unlikely to be an outlier on that front this year, given all the other elections in the world in 2024.
The post-2008 financial crisis is well and truly over and with interest rates now back above zero, the big pension fund switch from equities to gilts may not reverse but it’s gone as far as it can.
If another big tech bubble is forming, the UK should avoid it as we don’t have any big tech in the index. And on the upside, if companies are able to offload their pension schemes onto insurers or at least cut contributions, that means more money to invest or to return to shareholders.
UK equities have been uniquely weak for reasons that extend beyond the composition of the index. But those trends have largely run their course. So now it’s mostly sentiment at work. And sentiment can turn quite quickly — particularly if a panicked government decides to introduce tax breaks into the mix.
If the FTSE 100 remains some sort of global bargain bin then be patient.
The best-case scenario is that funds around the world look for high-dividend stocks that are cheap to add to their global portfolios at a time when defensive stocks are needed. It might take time, or it might happen quite quickly; the problem, as is always the case when dealing in the markets, is nobody knows when until it’s happened.
Once it has happened, of course, everyone can come out and say they knew it would!
The FTSE 100 had a weak late 20s and a nasty 30s — but having hit rock bottom relative to its peers, its 40s might prove to be some of its best years.
*~1Best~*
17 years ago
The London Stock Exchange (LSE) is a stock exchange located in London, England, UK. Founded in 1801, it is one of the largest stock exchanges in the world, with many overseas listings as well as UK companies.
Its current premises are situated in Paternoster Square close to St Paul's Cathedral.
The trade in shares in London began with the need to finance two voyages: The Muscovy Company's attempt to reach China via the White Sea north of Russia, and the East India Company voyage to India and the east. Unable to finance these costly journeys privately, the companies raised the money by selling shares to merchants, giving them a right to a portion of any profits eventually made.
The idea soon caught on (one of the earliest was the Earl of Bedford's scheme to drain the fens). It is estimated that by 1695 there were 140 joint-stock companies. The trade in shares was centered around the City's Change Alley in two coffee shops: Garraway's and Jonathan's. The broker John Castaing published the prices of stocks and commodities called The Course of the Exchange and other things in these coffee-shops. In 1697 a law was passed to "restrain the number and ill-practice of brokers and stockjobbers" following a number of insider trading and market-rigging incidents. It required all brokers to be licensed and to take an oath promising to act lawfully.
The Change Alley exchange thrived. However, it was to suffer a set-back in 1720. Much excitement was caused by the South Sea Company, stoked by brokers, the company's owner John Blunt and the government. Having set up the unprofitable company nine years previously the government hoped to wipe out the large debts accumulated by offering shares to the public. Shares in the company, which had started at £128 each at the start of the year, were soon fetching as much as £1,050 by June. The bubble inevitably burst, with share prices plunging to £175, then £124. The incident caused outcry, forcing the government to pass legislation to prevent another bubble, and it took a long time for the stock exchange to recover.
Jonathan's burnt down in 1748, and this, plus dissatisfaction with the overcrowding in the Alley, made the brokers build a New Jonathan's on Threadneedle Street, as well as charging an entrance fee. The building was soon renamed the Stock Exchange, only to be renamed again as the Stock Subscription Room in 1801, with new membership regulations. However, this too proved unsatisfactory, and the exchange moved to the newly built Capel Court in the same year. The exchange had recovered by the 1820s, bolstered by the growth of the railways, canals, mining and insurance industries (there were, however, problems with stags and dividend payments). Regional stock exchages were formed across the UK. Bonds (or gilt-edged securities) also began to be traded.
The former Stock Exchange Tower, based in Threadneedle Street/Old Broad Street was opened by Queen Elizabeth II in 1972 and housed the Trading Floor where traders would traditionally meet to conduct business. This became largely redundant with the advent of the Big Bang on 27 October 1986, which deregulated many of the Stock Exchange's activities. It eliminated fixed commissions on security trades and allowed securities firms to act as brokers and dealers. It also enabled an increased use of computerised systems that allowed dealing rooms to take precedence over face to face trading.
On July 20, 1990 a bomb planted by the IRA exploded in the men's toilets behind the visitors' gallery. The area had already been evacuated and nobody was injured.[2] The long term trend towards electronic trading had been reducing the Exchange's status as a visitor attraction and although the gallery reopened it was closed permanently in 1992.
In July 2004 the London Stock Exchange moved from Threadneedle Street to Paternoster Square (EC4) close to St Paul's Cathedral, still within the "Square Mile" (the City of London). It was officially opened by Queen Elizabeth II once again, accompanied by The Duke of Edinburgh, on 27 July 2004. The new building contains a specially commissioned dynamic sculpture called "The Source", by artists Greyworld.
[edit] Pursuit of LSE by prospective merger partners
In December of 2005, the London Stock Exchange rejected a £1.6 billion takeover offer from Macquarie Bank. The LSE described the offer as "derisory", a sentiment echoed by shareholders in the exchange. Shortly after Macquarie withdrew its offer, the LSE received a an unsolicited approach from NASDAQ valuing the company at £2.4 billion. This too it duly rejected. NASDAQ later pulled its bid, and less than two weeks later on April 11, 2006, struck a deal with LSE's largest shareholder, Ameriprise Financial's Threadneedle Asset Management unit, to acquire all of that firm's stake, consisting of 35.4 million shares, at £11.75 per share.[3] NASDAQ also purchased 2.69 million additional shares, resulting in a total stake of 15%. While the seller of those shares was undisclosed, it occurred simultaneously with a sale by Scottish Widows of 2.69 million shares.[4] The move was seen as an effort to force LSE to the negotiating table, as well as to limit the LSE's strategic flexibility.[5]
Subsequent purchases increased NASDAQ's stake to 25.1%, holding off competing bids for several months.[6][7][8] United Kingdom financial rules required that NASDAQ wait for a period of time before renewing its effort. On November 20, 2006, within a month or two of the expiration of this period, NASDAQ increased its stake to 28.75% and launched a hostile offer at the minimum permitted bid of £12.43 per share, which was the highest NASDAQ had paid on the open market for its existing shares.[9] The LSE immediately rejected this bid, stating that it "substantially undervalues" the company.[10].
NASDAQ revised its offer (characterized as an "unsolicited" bid, rather than a "hostile takeover attempt") on December 12, 2006, indicating that it would be able to complete the deal with 50% (plus one share) of LSE's stock, rather than the 90% it had been seeking. The U.S. exchange did not, however, raise its bid. Many hedge funds had accumulated large positions within the LSE, and many managers of those funds, as well as Furse, indicated that the bid was still not satisfactory. NASDAQ's bid was made more difficult because it had described its offer as "final", which, under British bidding rules, restricted their ability to raise its offer except under certain circumstances.
In the end, NASDAQ's offer was roundly rejected by LSE shareholders. Having received acceptances of only 0.41 per cent of rest of the register by the deadline on 10 February 2007, Nasdaq's offer duly lapsed[1]. Responding to the news, Chris Gibson-Smith, the LSE's chairman, said: "The Exchange’s strategy has produced outstanding results for shareholders by facilitating a structural shift in volume growth in an increasingly international market at the centre of the world’s equity flows. The Exchange intends to build on its exceptionally valuable brand by progressing various competitive, collaborative and strategic opportunities, thereby reinforcing its uniquely powerful position in a fast evolving global sector."[2]
On Monday 20th August 2007, NASDAQ announced that it was abandoning its plan to take over the LSE and subsequently look for options to divest its 31% (61.3 million shares) shareholding in the company in light of its failed takeover attempt. [11]
[edit] Alliances
[edit] Agreed Takeover of Borsa Italiana
On the 23rd June 2007 the LSE agreed to take over the Milan-based Borsa Italiana for 1.6bn euros (£1.1bn; $2bn). The combination will diversify the LSE's product offering and customer base.
On 8 August, shareholders in the London Stock Exchange approved the transaction. 155,767,201 shares were voted in favour of the merger with Borsa Italiana. This represented 100 per cent of votes cast and 78 per cent of issued share capital. The merger is now expected to complete in October following regulatory approvals and listing of the new shares.
The all-share deal will dilute the stakes of existing LSE shareholders, with Borsa Italiana shareholders receiving new shares representing 28 per cent of the enlarged register. Nasdaq's stake of nearly 30 percent in the LSE, which Nasdaq built up during a failed takeover attempt in 2006-7, will fall to around 22 percent following the deal with Borsa Italiana[12].
The enlarged group is expected to be eligible for inclusion in the FTSE100 index.
[edit] Collaboration with SGX
After the LSE rejected a £2.4bn takeover approach from Nasdaq in 2006, LSE showed that it is fighting to retain its independence and preferred to establish a Euro-Asian gateway for securities and derivatives. LSE is currently collaborating with Singapore Exchange (SGX) - calling it a major strategic partner in Asia - and is planning to take a large stake in SGX in the next few months.
[edit] Structure
The LSE is broken down into the Main Market and Alternative Investments Market (AIM), as well as EDX London (which handles derivatives). The independent FTSE Group maintains a series of indices for measuring the LSE, including the FTSE 100 Index, FTSE 250 Index, and FTSE 350 Index.
http://en.wikipedia.org/wiki/London_stock_exchange
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