The problem with the FTSE 100 is lack of technology stocks

The FTSE has all the hallmarks of an index still trading off 20th Century thinking — it needs more techs.

Article updated: 30 June 2020 11:00am Author: Michael Baxter

When I look at the S&P 500, I see an index that, just a few weeks ago, went within an inkling of hitting a new all-time high — short by three percentage points to be precise, although it has fallen a bit since then. (Down roughly 370 points from the all-time high set in February. That’s approximately down by 10%.)

The NASDAQ Composite hit a new all-time high a week or so ago.

The FTSE 100, by contrast, peaked in 2018 and is currently roughly 20% off that level and unlike the S&P 500 has never gotten close to recovering.

Covid effect

Blaming Covid for this dreadful performance isn’t good enough. Sure the UK has been hit-hard by the virus, but the US has been, and continues to be, hit harder still.

That second point is especially important. You could argue that on a per capita basis, the US has not suffered more than the UK from Covid, but the US still sees record daily infections. In the UK, where testing per million people is just as high as the US, new infections have been falling rapidly.

You could blame Brexit for the abysmal performance of the FTSE 100, but I'm not sure that argument cuts it either.

Yes, Brexit will, in my opinion, hit the UK economy hard, but the FTSE 100 offers global exposure. In many respects, the weakness of the pound ever since the Brexit vote should help many FTSE 100 companies, as much of their revenue and profits are generated abroad and then converted into sterling. So the weaker the pound, the higher the profits measured in the UK currency.

In reality, if you were to measure the FTSE 100 performance in dollars, or euros, it looks even worse.

FTSE 250

The FTSE 250 has faired a little better, it has lost around 18% from this year’s peak, but at least the index began the year at an all-time high

Drill down

But if you want to know why the FTSE 100 has performed so much worse than the S&P500, which in turn, has performed worse than the NASDAQ Composite, you only need to look at the individual companies that make up the indices.

Shares in BP and Royal Dutch Shell, two of the big giants of the FTSE 100, have lost around 40% of their value. HSBC is down by a similar amount. I could go on. With a few exceptions, the year has been unkind indeed to the FTSE superstars.

As for the exceptions, I shall return to them in a moment.

The US superstars

Contrast these performances with the stars of the S&P 500 and the NASDAQ Composite.

A handful of companies have provided most of the impetus behind the performance of these indices.

Apple shares are up roughly 8% this year. Amazon shares are up by 42%. Microsoft shares are up on the start of year price, Alphabet shares are flat, as are shares in Salesforce. Tesla shares are up 6%, Netflix is up by a third. Nvidia shares have increased by half of their start of year level.

Apple, Amazon and Microsoft are now worth $4.3 trillion between them.

The Covid crisis has simply exaggerated a trend that was in place before the crisis. It has accelerated the shift forwards digital. 

Old versus new

Old school companies are struggling. That is why the FTSE 100 has performed poorly. I'm afraid I put Warren Buffett into this category. Berkshire Hathaway shares are down 36% since the start of the year.

FTSE 100 exceptions

Some of the larger FTSE 100 companies have performed well. AstraZeneca shares are up 12%  that is primarily down to the work it has done in the fight against Covid.

But just as tech is where the future of business profitability is, so is healthcare. And where tech and healthcare overlap, the opportunity is especially pronounced.

That is why pharmaceuticals are bucking the trend, why GSK shares has only seen modest falls in its share price this year. 

Companies that seek traditional types of products but that have applied skill in adopting digital technology have also performed well. I put Unilever into this category, and shares are up almost 10% this year.

The big problem with the FTSE 100 is not enough technology stocks and not enough companies applying digital technologies as well as they could.

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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