Why has the FTSE 100 index done so well, as UK economy teeters with recession?


2022 was a year from hell for stock market investors. 

Risk assets returned their worst year since the great financial crash of 2008, as inflation spiralled aggressively and forced central banks into the fastest interest rate hiking cycle in recent memory. 

And while 2023 has brought some respite, as the market moves to the expectation that perhaps interest rates will taper off sooner than otherwise expected, investors are still licking their wounds, such was the scale of the pullback last year. 

But not everything got pillaged. There have been pockets of refuge for investors amid the madness. One of those has been the FTSE 100 index. 

The British index is within 4.6% of its all-time high, which it hit in February of this year. 

Presenting its 2022 performance against a selection of other stock indexes highlights the scale of its outperformance. 

It was the only index to generate a positive return for investors, as pretty much every other major stock index scaled back massively, both with respect to tight monetary policy but also the Russian war in Ukraine, as well as lingering COVID effects (especially in China). 

Why did the FTSE hit an all-time high?

So, how did the FTSE 100 index hit an all-time high this February?

Well, it certainly can’t be down to the performance of the British economy. In February, the IMF forecasted that the UK would be the only advanced economy to contract in 2023. 

The country has struggled economically post-Brexit. I wrote a deep dive on the state of the nation’s plight last October, but it’s been a very rough go of it for the UK. 

Perhaps 2022 can be summed up by the disastrous 49-day reign of Prime Minister Lizz Truss, who was forced to go after nearly bankrupting the country via an ill-fated budget. The Bank of England ultimately stepped in as the buyer of last resort to stem a full-blown pension crisis. 

And so the UK had three prime ministers and two monarchs in seven weeks, all while fighting a massive cost-of-living crisis –  even today, inflation remains at 10.4%, up 30 bps from last month. 

In short, no, the UK economy is most definitely not performing well. 

Energy crisis and commodity prices fuel FTSE 100 gains

While the energy crisis caused big problems for the economy at large, the boon to oil and energy prices drove shareholder prices north – feeding into the stout return of the FTSE 100. 

Oil firms such as BP and Shell reported bumper earnings, as despite the gloomy backdrop behind surging oil prices, the pockets of investors were lined like never before. 

The index has also been boosted by commodities, which have risen in price sharply due to supply constraints and the transition of China from zero-COVID to full reopening. 

With profits mushrooming due to these factors, share prices have soared, even if it seems counter-intuitive when compared to the sluggish UK economy. 

The FTSE 100 also lacks tech companies. It can almost be viewed as the boomer of indexes, with less Silicon Valley-types and more old-school companies such as oil, mining, tobacco and banks. 

And there was no worse sector than tech last year, as the area is extra sensitive to rising interest rates. 

Weak pound and multinational earnings 

Then there is the matter of where profits are sourced. Approximately 75% of the revenue of FTSE 100 companies is derived from abroad. 

Not only does this mean that companies’ prospects are less tied to the fate of the UK, but they also received a massive boon from the pound depreciating against the euro so heavily (USD/GBP). 

While it has bounced back somewhat since October, for the bulk of 2022, the pound was crushed by its American counterpart. 

To wrap up, the makeup of the FTSE 100 is rather unique in that it is more sensitive to commodity prices and foreign-sourced income, meaning that 2022 was a perfect storm for it as commodity prices soared and the pound depreciated. 

The best way to signify this is to compare the FTSE 100 performance to the FTSE 250, which is the other UK index, but comprised of the top 250 companies by market cap rather than the top 100 companies. 

The difference in performance between the two indexes was the largest since the 80s, with the FTSE 250 more sensitive to the British company and falling by 19.7% compared to the 4.7% gain of the FTSE 100. 

It was the first time the FTSE 100 had outperformed the FTSE 250 since 2018. 

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