On Friday last week, the FTSE 100 climbed 12.63 GBP from 6,999.1 to 7,011.64, marking another month in 2016 that the index has closed above the 7,000 mark and bringing it about 127 points short of the all-time high. The index is a crucial benchmark for the health of the British economy, projecting the performance the top 100 corporations listed on the London Stock Exchange. As such, analysts and concerned citizens alike have historically kept an eye on the “Footsie” since its beginnings in January 1984.
When the FTSE 100 reaches a high mark, it generally means that Britain’s largest companies are doing well, which is a positive for most UK-based markets. While the FTSE 250 is widely accepted as being a more accurate indicator of the economy’s overall health, the FTSE 100 offers a succinct view of what’s happening at the top and its success typically correlates with other desirable economic conditions. As the pound keeps sliding and the FTSE continues its ascent, many investors and traders are researching the performance of the index and how it might have an impact in their sector.
Higher FTSE 100 and lower pound value is good for the economy
The latest pound depreciation marks the 7th time the currency has significantly plunged in value during the past 100 years, and all previous times the combination of a higher FTSE 100 and a decrease in pound value has equated to the economy becoming less reliant on consumer spending and more able to benefit from the gains of manufacturers and large corporations.
If you were a foreign exchange trader using resources such as xe.com or platforms such as ETX Capital to track the strength of currencies in terms of exchange rate, you might initially think that the pound losing strength is bad for the UK economy. However, from the perspective of an economist, it has been proven that historically a weakening of the pound can lead to positive impacts on the British economy because it reduces the cost of exports and encourages an influx of funds from other countries, while also swaying growth in favour of big business (i.e. – the companies you’d see on the FTSE 100).
In September 1992, a 15% drop in value of the pound boosted exports and by 1997 this trading environment led to a more balanced economy than the UK has had since the 1984 surplus. However, the pound’s decline in 2007-2009 didn’t provide as much of a boost because the global financial crisis of 2008 restricted sales, and by that time there was less room for expansion in the manufacturing sector.
Recovering from the aftermath of Brexit
Flash forward to mid-June of this year and the FTSE lost $80bn in value within the span of four days as investors became concerned about the Leave campaign taking a significant lead. Surprisingly, within only four months, a total value of $193bn was added back into the index, culminating in a new all-time high on 11 October with the index closing at 7,129.83. The new high was helped along strongly by the decline in the value of the pound, which reached its lowest point in 168 years in mid-October.
The benchmark’s recovery has not been straightforward. We saw the pound begin to soar in early November after the Bank of England hinted that it would not be cutting interest rates further and the High Court ruled that Parliament needed to further approve the Brexit process. These two events spurred a wave of uncertainty surrounding the future of the Leave agenda and led to the FTSE 100 declining rapidly during the first week of November. However, we have seen a strong rebound in the markets going into December as the UK continued with its plan of setting itself apart from the European Union.
When the FTSE climbs, unemployment falls and self-employment rises
When the index does well that is a sign that the biggest companies in the UK are generating profits and expanding quickly enough to hire more employees – so a rise in the FTSE 100 typically correlates with low unemployment. Perhaps the best example of this was the first quarter of 2014, when the FTSE 100 reached a 14-year high while the unemployment rate reached a 5-year low according to the Office of National Statistics (ONS).
Interestingly, a rising FTSE 100 also equates to an increase in self-employment, possibly because the same trends that inspire entrepreneurship coincide with corporate development and growth. A healthier economy is more conducive to launching new businesses, so it makes sense that when the most established companies are doing well, investors are more confident in the prospect of making entry in any sector. Conversely, when the economy is doing bad, it’s more difficult to obtain funding and people are less optimistic about starting their own endeavours.
Will the FTSE 100 surpass its all-time high again?
We’ve seen a relatively steady increase in the FTSE 100 since the Brexit vote in June, with only a few occasional dips due to uncertainty surrounding the government’s plans for the process. It seems the UK may be making an attempt to improve its financial standing as it embraces a new political landscape, with the UK more independent and economically balanced than it has been in quite some time. And it is possible that 2017 will bring a month even better than October of this year.
On 11 October the index reached it’s highest point yet at 7,128, topping the previous record set in April 2015. If the trend continues, next year could also see a record-topping month, but we’ll likely see a decline before the index boosts back up again. It would be surprising to see the FTSE abandon its somewhat cyclical nature and continue on a steady ascent, but it’s certainly possible given the newly favourable conditions of the UK economy.
What does this mean for small businesses?
Small and medium-sized enterprises (SMEs) are in an ideal position to land new clients and projects when the FTSE is soaring because executives are typically more conducive to propositions when the markets are doing well. This is particularly true for service providers and B2B companies that supply larger corporations with materials, software, and other solutions.