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The changing face of the FTSE 100 – what could the future look like?

We take a look at how the FTSE 100 has changed over time and what the future could look like.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Like most things, the FTSE 100 changes as it ages. But where does it stand today compared to decades gone by? More importantly, what does this teach us about the UK’s investment appetite, and what could the future of the index look like?

Weightings of sectors in the FTSE 100 (%)

Source: Refinitiv, data correct as at 11/5/2021.

The FTSE 100’s biggest constituent is materials. Most of this sector is made up of miners. Giant Rio Tinto used to be the sole miner, but that list has swelled to include the likes of Anglo American, BHP, Fresnillo, Glencore and others.

Today the sector makes up 19.6%*, by weight, of the FTSE 100. This has risen from just 3.2% in 1995 and 4.6% 20 years ago.

But why do miners make up such a huge chunk of the index now?

Firstly, the London Stock Exchange became home to some mining giants over the years, boosting the sector’s footprint. Plus, the global need for raw materials is pretty reliable. It’s not like iron ore’s a fad that will go out of fashion – it’s a necessary building material and has been all through the ages.

There have been cyclical highs and lows over the years (mining stocks have tended to do well when the economy’s doing well, and less well when times are tough), but overall, these companies have grown. That’s because ultimately, the world still needs copper and iron ore, lots of it.

More recently, they’ve been buoyed by soaring commodity prices and a weaker US dollar too.

The UK lives off the day-to-day stuff

The next biggest sector is financials. Banks and insurers make up 17.1% of the FTSE 100’s weight, which is up over 5 percentage points compared to 1995, but pretty much unchanged from five years ago.

The sector has been battered and bruised because of the pandemic, but that doesn’t stop it playing a huge part in the UK markets.

An interesting thing to keep in mind is that with a market cap of a whopping £92.8bn, HSBC is the biggest bank by market cap. That means it plays a substantial role in moving the UK’s most famous index. But its fortunes are decidedly international, with about 65% of pre-tax profit coming from Asia.

Net change in sector weightings over time (%)

Source: *Refinitiv, data correct as at 11/05/2021.

Both the materials and financial sectors are hardly exciting. But they’re reliable to some degree: demand for these products isn’t going to evaporate. Money and metals make the world go round. They’re how we build skyscrapers. They’re how we pay for those skyscrapers. One thing’s clear, while the pandemic has been a serious shock to the financial system, the status quo is very much intact.

This in itself is where unmasking the changing face of the FTSE is interesting. It proves the UK’s steadfast penchant for all things useful. Exciting tech stocks, banks are not.

So what’s losing weight?

While the big picture might look similar, the FTSE 100 is far from immune to change. Changing trends will cause this famous index to shapeshift, and after doing some digging, the results are quite stark.

Miners vs communication services and energy (%)

Source: Refinitiv, data correct as at 11/5/2021.

26 years ago, communication services accounted for 8.1% of the FTSE 100, it’s now just 4.1%.

There are two sides to this shift.

The first is the shrinking fortunes of BT and Vodafone. An uber-competitive environment for each of them, has played a huge role in their smaller statures. In the case of Vodafone, huge chunks of the business have been sold too. Back in 2014 Verizon paid $130bn for a substantial piece of Vodafone’s indirect holding in Verizon Wireless.

The other important thing to notice is the communication sector includes traditional media companies. ITV and WPP are the two that spring to mind. There’s a structural decline happening in traditional media, and these two are rocks of this struggling industry.

The oil majors are also shrinking in size. The energy sector makes up just 12.4% of the index. 20 years ago this was 15.2%. The share price performance of giants BP and Shell is very closely linked to the oil price, and this has fallen almost 13% in the last ten years. It’s also worth considering increasing Environmental, Social and Governance (ESG) awareness and the role this plays on the size of the oil majors. More on that later.

What about the pandemic?

Because weightings give more precedence to bigger companies, they can hide other interesting trends.

Something that really stands out is the huge increase in the market capitalisation of consumer discretionary stocks over the last year. We usually wouldn’t look back at something with a one year view – that’s pretty short-term. But we aren’t in usual times.

Consumer discretionary market cap (£bn)

Source: Refinitiv, data correct as at 11/5/2021.

The pandemic’s added about £56bn, which is around a 47% increase, onto the market cap of this sector in the last year. It includes retailers B&M and Ocado, luxury retail and housebuilders. You’d usually expect spending to have fallen off a cliff in times of such great economic volatility. But consumers have clearly continued to splurge in certain areas. That has a lot to do with the seismic shifts in where money’s being spent.

On one hand, people conscious about money in these tough times are likely to have transferred to discount retailers. The other side of the coin is that some of the nation has spoiled itself. We went all out for Christmas and Easter to try and make the best of a bad situation. Higher-end Ocado benefited from this mindset, and the huge shift to online groceries during lockdown.

Finally, given the boutique is a huge part of the luxury apparel appeal, it’s been surprising to see the luxury sector hold up so well. People have continued to clamour for the latest Insta-worthy look, even if that meant using a website instead.

Where next for the FTSE?

Looking ahead, energy is likely to be the sector that changes the most. As giants BP and Shell pivot towards renewable energy, one of two things is going to happen. Their transformations could be successful, and they’ll become much less reliant on the oil price, giving the businesses room to expand perhaps more quickly. This wouldn’t be a given though – oil prices could rise in the future if demand remains high, but supply becomes constrained.

The other risk is that transformations could fail, meaning the groups are over-exposed to high carbon fossil fuels as the world transitions to green solutions. They’d then ultimately shrink, making up a much smaller piece of the FTSE 100. The colossal sums invested in green energy would also have been for nothing.

It’s also important to remember that those choosing to sell down their oil and gas assets to focus on renewables, face huge execution risk. In both scenarios, performance on an operational level could suffer, sending shocks through the share price.

Either way, in the coming decades, the energy sector is going to be a very different beast to what we know today.

The same but different?

Miners are likely to remain heavyweights of the index. But this will be for new reasons – we’re likely to see growth because of accelerated ESG trends.

The electric vehicle revolution means the need for the likes of Anglo American’s platinum group metals, is expected to increase. And this is a growth opportunity on top of what should be steadily increasing demand for the raw materials needed for construction and industrial production all over the world.

Banks, for what they’re worth

At the moment, the banks in the FTSE 100 are trading on an average of 0.56 times the value of their assets. That’s about 46% lower than the ten-year average. If these were to gain ground and trade back at their long-term average of 0.82 times book value, that would increase their weighting in the FTSE 100 to around 13.0% (assuming the rest of the index carries on as-is).

Post-recovery market cap of financial sector (£bn)

Source: Refinitiv, data correct as at 11/5/2021.

Whether or not this happens will depend largely on how the banks fare in a low interest rate environment. If rates stay on the ground, it will make turning a profit on loans a much more difficult task. Jitters around this are a large reason why those share price valuations are currently so low.

More tech?

Today, the FTSE 100 is decidedly a little unexciting. Unlike the likes of NASDAQ, the London Stock Exchange’s biggest companies tend to be traditional profit and cash generative businesses.

Downing Street would like this to change, and want to encourage more forward-thinking, high growth, tech names to London. That’s why Deliveroo’s flop was so disappointing – it could put tech names off choosing the LSE in the future.

But London’s lack of tech presence stems far past one disappointing IPO. London’s investment appetite still appears conservative at its core, with little desire for loss-making start-ups. In our view, that’s unlikely to change for some time.

Our verdict

The FTSE 100 has shapeshifted over the years, but its core remains familiar. The UK’s reliance on materials and financials is unlikely to be shaken down anytime soon.

The biggest risks and opportunities for investors looking to the future will involve understanding how the oil majors’ green plays pan out. And in the nearer term, it’ll be worth keeping an eye on how consumer discretionary spending shapes up – we suspect this sector has been forever changed by the pandemic, and that kicks up some serious opportunities.

This article isn't personal advice. All investments and any income they produce can rise and fall in value, so you could get back less than you invest. If you're not sure if an investment is right for you, ask for financial advice.

Unless otherwise stated estimates are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Past performance is not a guide to the future. Investments and income they produce can rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.


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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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