The FTSE 100 is 36 years old this month – a little too young for a mid-life crisis but, as a millennial, the perfect age for a moment of existential angst and for pondering its impact on the world. It is not interested in buying the Porsche but it’s definitely flirting with veganism.
As the Index enters middle age what does the next decade hold? Making predictions is a fool’s errand but some of the broad brushstrokes of what lies ahead are becoming clearer thanks to a decisive election result, the fog around Brexit lifting, and the urgency with which the UK is trying to secure economic power in its own right outside of the EU.
The FTSE 100 is not a way of taking the temperature of the UK economy – more than 70 per cent of its revenues are international. It’s clear from its ten largest companies that the FTSE 100 is a global citizen:
So, if you’re looking for an index to tell you about the health of UK plc then you need to look to the FTSE 250 and beyond. What the FTSE 100 illustrates is the UK’s role in playing host to some of the world’s largest companies.
If you look over the past ten years at who has joined the Index, left the Index and who didn’t even exist at the beginning of the decade then you begin to see that there haven’t been any really dynamic shifts or extraordinary new companies bursting on the scene. Most of the changes come from movement between the indices, as market capitalisations fluctuate, and from M&A activity. We’re not even witnessing the birth of new stars with the two companies in the Index that didn’t exist in 2009 – Flutter Entertainment and IAG. They are simply both products of mergers.
The composition of the Index will always evolve, but the pace of that change in the UK is accelerating faster than other major markets.
Public vs private
The size of the private equity market has reduced companies’ dependency on going public for access to capital.
In 2018 the number of publicly listed companies going private rose by 40 per cent. And in 2019 the lowest number of companies, just 34, applied to be listed since 2009 with the money raised nearly half of that from the year before. 2019 was a particularly unsettled year to try to land an IPO, and there were some high profile IPOs that didn’t go exactly to plan: Uber, WeWork, Saudi Aramco.
Going public is not the default option. Look at the size and reputation of the largest private companies in the UK – they seem to be doing just fine without the London Stock Exchange’s seal of approval.
Who will dominate the Index?
A particular worry for the Index, as the new decade roars into life, is the poor representation of tech companies on its list. Contrast the S&P 500, the main listing for US equities: tech companies account for about a quarter of its listings – compared to only one per cent on the FTSE 100.
Talk to those in the tech markets and they will readily concede that UK start-ups in, say, fintech, quantum research and the life sciences are presently most likely to seek venture capital or private equity funding, and then acquisition by one of the tech giants. But they also describe an alternative landscape in which Boris Johnson pulls every fiscal and regulatory lever available to them in the post-Brexit world to make the London Stock Exchange the most attractive place in the world for cutting-edge businesses to float. The rise of tech firms in India, Israel and Africa prompts the question: why should they not launch IPOs in London and blaze a trail on the FTSE 100?
What we can see in the nearer term is that, whatever the composition of the Index, the public and institutional expectations of a listed company are changing fast. Being a constituent of the Index will require more than just meeting the listing requirements in terms of market cap and financial probity.
Environmental, social and governance (ESG) investing is becoming a central part of the investment market.
In the five years between 2014 and 2019 money pouring into ESG products increased by nearly 2500 per cent. By October 2019, £4.4 billion had already been invested in UK ESG funds that year alone. 70 per cent of this £4.4 billion was invested in active funds as opposed to passive. That means there are a lot of portfolio managers who are having to make decisions using more than the measuring tape of revenue targets, margins, market share and dividend growth.
With the consumer sector rising as a whole to be the second largest sector constituent of the FTSE 100, ESG focus is driven by, and driving, conscious consumerism. A 2016 Deloitte study found that 56 per cent of millennials will exclude unsustainable companies from their shopping lists. Giants like Unilever have met this head on.
The company reported: “In 2018, our 28 Sustainable Living Brands – those taking action to support positive change for people and the planet – grew 69% faster than the rest of our business. That’s up from 46% in 2017. They also delivered 75% of our overall growth.”
And it’s not just consumers who will be driving companies to commit to higher standards. Global organisations are constantly in fierce competition to attract and retain the best talent. The 2018 Deloitte Millennial Survey found that 40 per cent of those polled believe the goal of businesses should be to “improve society”.
The ESG investment agenda and change in consumer behaviour come together in a new frontier for activism: pensions. It’s why the Index will matter more than ever in the 2020s.
The next decade will see the ‘Great Wealth Transfer’ from ‘boomers’ to ‘millennials’. The UK housing market is worth over £7 trillion and even if inheritance tax takes a chunk out of it there is still set to be a wave of money changing hands.
When this money passes to the next generation they will be investing with a very different set of criteria. They want transparency and accountability from the companies in which they work and invest. They will demand more impactful investment options via their company pension schemes, choose their banking provider differently, and will have a lot longer to exert their influence thanks to increasing life expectancy.
Over the next decade membership of the Index will mean that a company is prepared to stand up and be counted – in every sense.
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