For the first time in 12 years, the FTSE 100 is set to remain unchanged, with no promotions or demotions announced in the Q3 reshuffle, which will be finalised on 21 September. The index, which lists the top 100 blue-chip companies on the London Stock Exchange, has seen more than 400 changes since its launch in 1984. However, thanks to stable market capitalisations within the FTSE 100, no changes are to be made in Q3.
Reshuffles in the FTSE 100 take place on a quarterly basis. The previous restructuring, which took place in June, saw new entries from sports betting group GVC Holdings and online supermarket Ocado, and exits from Mediclinic and G4S.
Analysts have attributed the current stability to the relatively peaceful summer blue-chip stocks have experienced. Despite this, Laith Khalaf, a senior analyst at stockbroker Hargreaves Lansdown, advised that the market was not a “flat lake with no ripples”. He added: “There’s not a blanket lack of movement – we are seeing movement down in the FTSE 250 and SmallCap, but not enough to remove big names.”
Historical rarity
The lack of change in the FTSE 100 is a rare phenomenon and has only occurred six times since the index was launched in 1984. Previous incidences of such stability include March and June 1995, when a dramatic drop in the rate of inflation and recovery from a deep recession led to a sustained period of economic prosperity for much of the FTSE 100, and March 2006, when a lengthy period of economic growth allowed many key members of the FTSE 100 to cement their positions within the index.
The lack of change in the FTSE 100 is a rare phenomenon and has only occurred six times since the index was launched in 1984
This is also the first time since the 2008 financial crisis and the 2016 Brexit vote that the FTSE 100 is to remain constant. A significant proportion of the FTSE 100 is made up of multinational firms, and 40 percent of FTSE 100 CEOs are not British nationals, making this stability particularly surprising given the international uncertainty surrounding Brexit.
In fact, the index has enjoyed a successful few months, and in January this year hit a record closing high of 7,724. This prosperity would suggest that the FTSE 100 has remained relatively immune to the impact of Brexit. However, Albrecht Ritschl, Professor of Economic History at the London School of Economics, suggests that it is not immunity but rather “paralysis due to considerable uncertainty” that is responsible for the lack of change.
He added: “There is limited movement in any direction; rather, the economy has been moving sideways, or treading water. That’s perhaps reflected in the stable composition of the FTSE. We can expect quite a bit more change once the perimeters of Britain’s future trade arrangements become clearer.”
Although stability in itself is positive, the reasons behind it are not so. An economy that is treading water, as Ritschl put it, can only survive for so long, and while there’s a chance it may progress into a period of economic growth, there’s also a risk that it will head in the opposite direction.
Russ Mould, Investment Director at AJ Bell, warned of an end to the period of stagnation and significant fluctuations to come. “The lack of change shows that the market has been largely directionless over the past few months, but the summer can be a quieter time for markets and three months is a short period of time, so we shouldn’t read too much into it.
“Given this is the first quarter without a change since before the financial crisis, it is unlikely the period of calm will last too long, particularly with the uncertainty surrounding Brexit and global trade wars likely to have disproportionate effects on businesses depending on the sector they are in and where they operate.”
Volatility at the top
Stability in the FTSE 100’s market capitalisation has not extended to its leadership. This year has seen no less than 17 chief executive exits, the most recent being the unexpected resignation of Sage’s CEO last Friday.
Stability in the FTSE 100’s market capitalisation has not extended to its leadership. This year has seen no less than 17 chief executive exits
Stephen Kelly’s departure wiped over £500m ($647m) off the value of the software giant. He claims to have departed over concerns about moving customers to cloud-based solutions. Other significant appointments in 2018 include Mark Read, who succeeded Martin Sorrell as CEO of WPP, and Carolyn McCall, who joined ITV from EasyJet.
Khalaf stressed that the departure of a CEO does not necessarily equate to trouble within the firm: “A CEO leaving can be a sign of distress, or a natural progression.”
FTSE 100 CEOs have come under fire in recent months for exceedingly high salaries, rapid wage growth and the underrepresentation of women. A report from The High Pay Centre and CIPD published last month revealed that the total pay for all FTSE 100 CEOs topped £550m ($711m), and median pay rose by 11 percent between 2016 and 2017, taking the average CEO salary to £3.93m ($5.08m).
The highest paid FTSE 100 CEO in the 2016/17 financial year was Jeff Fairburn of domestic construction firm Persimmon. Fairburn took home £47m ($60.78m), 22 times his salary the previous year.
Safeguarding legacies
Although the current stability in the FTSE 100 is unlikely to be long lasting, it has significant implications for the global economy. The FTSE 100 is a London-based index, but the proportion of global companies within it means it also provides a barometer of the state of international trade relationships.
Not only that, to gain automatic entry to the FTSE 100, a company must reach the market capitalisation of the 90th firm; this is currently £5.5bn ($7.11bn). Demotion occurs if a firm’s value falls to that of the 111th company on the FTSE 250, currently £4.2bn ($5.43bn). For a company in the upper quartile to risk demotion, they would have to suffer significant losses.
Therefore, stability is evidence that key players are standing strong and doing all they can to protect themselves from the potentially damaging effects of Brexit and global trade wars; for many, such future-proofing has included strengthening leadership by appointing a new CEO.
As the November deadline for Brexit negotiations draws closer, those firms on the periphery of the FTSE 100 are increasingly at risk and will be keenly considering their corporate strategy before the next reshuffle.
