Cancelled Christmas and no-deal Brexit: The UK has got problems, but that's not a reason to ditch FTSE 100 companies

Thanks to a mutation in Covid-19 leading to the virtual cancellation of Christmas and a potential no-deal Brexit, the UK economy is entering a trying period, but that does not necessarily mean the FTSE 100 is about to suffer.

Article updated: 21 December 2020 8:00am Author: Michael Baxter

One number explains it: that number is three quarters. This number explains why the fortunes of the FTSE 100 and UK economy are not especially aligned. Indeed, sometimes, when sterling falls, the FTSE 100 rises. And the reason is three quarters.

I'll explain, but first, sit down and prepare for bad news, not that the bad tidings I bring will come as a surprise.

The UK economy faces its biggest dual threat in, well I don't know how long. The dual-threat is called no-deal Brexit and a mutation in Covid-19.

Not everyone agrees with Boris Johnson's decision to cancel Christmas practically. Words fail me in trying to convey what this means, but then it's hardly necessary — we all know. In my favourite book as a child, The Lion the Witch and the Wardrobe, the wicked witch made it so that it was always winter in Narnia but never Christmas — the horror of those circumstances. Then, when my kids were little, one of my favourite children's movies was about How the Gringe Stole Christmas.

But I don't think our prime minister is either like the wicked witch or the Grinch — no, that description applies to Covid-19 itself.

The disaster of mutated Covid-19 devastating South East England in particular, effectively ruining Christmas, is hard to qualify. All I can say is that it is a disaster. 

And then there is Brexit. Returning to my kids, when my son was very little, he hit another boy with a stick. He burst into tears, proclaimed his innocence and said it wasn't him who hit the boy; it was the stick. I am reminded of this story when the UK, the same UK that talked about 'no deal being better than a bad deal', or how 'The EU needs us more than we need it,' or how we will 'have our cake and eat it,' the same UK that has chosen to divorce its partner, blames the EU for Brexit negotiations. It is too rich for words. When Project Fear turns into Project Right, we are told that the EU's position — entirely predictable and indeed understandable — illustrates why we are better off without it.

I don't think Johnson is like either the Grinch or the witch from Narnia, but I do have serious misgivings. This movie may convey my sentiments on this point.

We may or may not find we have no deal come January 1st; I find it hard to imagine more difficult circumstances facing the UK during peacetime.

Three quarters

And yet I am not so sure the answer is to ditch the FTSE 100. And this is where three quarters enters my story.

Roughly three-quarters of revenue pertaining to FTSE 100 companies is generated abroad.

And while a no-deal Brexit will be bad news for UK exporters to the UK, the vast majority of this three-quarters of revenue is not in the form of exports. Instead, it relates to multinationals which sell goods and services from overseas subsidiaries to the markets where these subsidiaries are based.  

I don't believe that either cancelled Christmas or no-deal Brexit will have a serious impact on these multinational companies that make up such a high percentage of the FTSE 100.

Sterling

And then there is sterling. Under normal circumstances, I would say that predicting foreign currency movements is a mug's game. But if a no-deal Brexit and cancelled Christmas in London and the Home Counties doesn't have a negative impact on sterling, then I am a monkey's uncle.

But in the highly unpredictable event that sterling falls, and which I have just predicted, then for the FTSE 100 that's okay. And it is okay, thanks to the three quarters.

Because, for the three-quarters of FTSE 100 revenue generated abroad, a fall in sterling has the effect of boosting that revenue, when measured in sterling, in proportion to the currency's fall.

Nearly all of the FTSE 100 

I do have a separate issue concerning the FTSE 100. It might offer good exposure to the global economy, but it offers very poor exposure to the future of the global economy. The dearth of tech companies making up this index is its biggest weakness, and I find that tragic. The land of Alan Turing, the land from where Tim Berners Lee, the creator of the World Wide Web, hails, the land that saw the isolation of graphene, and the land of DeepMind, the AI company that cracked the problem of protein folding, has a dearth of tech companies listed on its main stock index. And actually, I think I blame a short-sighted and blinkered attitude emanating from the City for that. (Like the Grinch that stole so much promise) And that is a crying shame.

For reducing your exposure to the horrific implications of a cancelled Christmas and a no-deal Brexit, however, the FTSE 100 isn't a bad option. 


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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