Keep away from the FTSE 100 like we would if it was the plague? Maybe there’s a good reason to do so. The UK economy is slowing. Domestic growth looks bleak, downgraded just this week.
Tariffs might be coming too. President Trump has already slapped them on some of the US’s closest trading partners. Who’s to say the companies over here in the UK won’t be dealing with them next?
A lot of signs point to the same thing: treat the FTSE 100 like a disease from the 14th century! That’s what it’s easy to think, anyway.
Climbing up
Ok, back to the real world. A fresh new year filled with an onslaught of doom-mongering newspaper headlines about tariffs and the state of the British economy hasn’t actually harmed the Footsie. On the contrary, it’s been ripping through one record high after another.
The barriers of 8,500 then 8,600 then 8,700 all fell in quick succession. The day I write this (12 February) it finished at 8,808!
What’s going on here? Could all the doom and gloom be misplaced? Is the FTSE 100 gearing up for a rip-roaring bull run?
Let’s start by explaining what happened thanks to the peculiarity of the FTSE 100. For one, it’s somewhat detached from the UK as a whole.
Yes, every company is listed on the London Stock Exchange, operations are managed within our borders and there’ll be an HQ somewhere with a British-sounding name.
But these are mostly huge, international enterprises. Across the index, 75% of revenues are drawn globally. That’s a huge amount of global diversification a fact that sometimes gets overlooked.
Global revenue means global currency, which these days is the dollar. Indeed, a number of Footsie firms report in dollars.
The key detail here is that the dollar has been climbing since last September. Hence, the FTSE 100 has been climbing too.
Tariff threats
A second important detail is the services-based nature of the index. Take HSBC, for instance. The bank does a large amount of business abroad, particularly in Hong Kong, China and the US, which reduces its reliance on what’s going on over here.
But HSBC sells services rather than physical products. Without importing or exporting anything the looming trade war isn’t a major concern (although exceptional circumstances may change this). As a result, HSBC shares have been mostly unaffected by the talk and are up around 40% since last August.
Much of the FTSE 100 is in the same boat and could make it an interesting place for any would-be investor to consider. It should come as no surprise really, it’s long been known as a defensive index.
As for HSBC, its above-average dividend yield of 5.68% looks enticing although its reliance on China and its economy to sustain revenues could be a concern. Personally, I have enough exposure to the banking sector for me to buy in today. But I think it could be worth investors considering.
This post was originally published on Motley Fool
