FTSE 100: What's behind Its lackluster performance in 2023?

The FTSE 100 index began 2023 on a positive note but has since fallen behind other major stock markets, making it one of the worst-performing indexes. So, what exactly is causing the Footsie to struggle?

While the FTSE 100 has managed to generate modest positive returns over the past year, it stands alone as the only index that has recorded a negative return during this period. Even the STOXX Europe 600 index, which is the second-worst performer, has outperformed the FTSE 100. Moreover, both US indexes and the Japanese index have surged far ahead of the UK market.

So, why is the FTSE experiencing a lacklustre performance?

One significant factor is the impact of Brexit. The 2016 decision to leave the European Union has led to challenges for certain UK firms, particularly in European supply chains. EU companies now prefer to work with fellow EU firms due to the additional bureaucracy involved in dealing with UK businesses. As a result, trade between the two blocs has decreased, negatively affecting company revenues and earnings.

Another contributing factor is the composition of the FTSE 100 index. It predominantly consists of traditional “old-fashioned” companies such as banks, insurance firms, miners, housebuilders and utility companies. The surge in interest rates and consumer inflation since December 2021 has impacted these businesses significantly. Additionally, the absence of large-cap tech stocks has prevented the FTSE from benefiting from the excitement surrounding artificial intelligence (AI) that has propelled stocks in the US and other markets.

The decline in oil prices has also played a role in the FTSE’s performance. With two oil and gas supermajors among the FTSE’s top-five largest companies, the drop in the price of Brent crude by nearly 9.5% in 2023 has negatively affected the index.

Furthermore, the UK economy has faced challenges due to persistently high inflation. Rising consumer prices, coupled with sky-high energy bills, have placed immense strain on household budgets. Consequently, consumer spending has decreased, impacting certain companies and sectors.

The political landscape has added to the uncertainties. The years 2022 and 2023 witnessed considerable volatility in British politics, with multiple prime ministers, and chancellors. The resulting changes and instability have damaged confidence in the government’s economic competence. In light of this, investors seek a more stable regime and look for investment opportunities outside the UK.

Lastly, the shift in strategy by UK pension funds and insurance companies has contributed to the FTSE’s lacklustre performance. In the late 1990s, these institutions owned more than half of UK stocks. However, over the past 25 years, they have divested from stocks and opted for safer bonds, significantly reducing their ownership of UK stocks.