Every evening bulletin ends the same way: the FTSE 100 closed up or down some number of points, delivered in the tone of a national health check. It is nothing of the sort. The index, launched in January 1984 with a base value of 1,000 and maintained by FTSE Russell, a subsidiary of the London Stock Exchange Group, simply tracks the combined market value of the hundred most valuable companies listed in London. Membership is reviewed quarterly, in March, June, September and December, with promotion and relegation to and from the FTSE 250 decided by market capitalisation, adjusted for the free float of shares actually available to trade.
What that hundred contains is the first problem. Listing in London is not the same as doing business in Britain. FTSE Russell's own analysis has consistently put the share of constituents' revenue earned overseas at roughly three quarters. Shell and BP sell oil and gas into world markets priced in dollars. Rio Tinto, Glencore and Anglo American dig minerals out of Australia, Chile and southern Africa. AstraZeneca and GSK sell medicines globally, with the United States their largest market. HSBC makes most of its profit in Asia. Unilever and Diageo sell soap and whisky on every continent. Several constituents, among them the miners, have barely any operational footprint in the UK at all beyond a head office and a listing.
Weighting is the second problem. Because the index is weighted by market value, its movements are dominated by the largest names: the top ten companies routinely account for around 40 per cent of the whole. A strong day for Shell, AstraZeneca and HSBC can drag the index upwards while the other ninety-odd members drift. The industries those giants represent, extraction, pharmaceuticals, banking and consumer staples, bear little resemblance to the composition of British output, which the Office for National Statistics puts at roughly four fifths services. The businesses that employ most British workers, from retailers and builders to the vast unlisted small-business sector, are either a rounding error in the index or absent from it entirely.
The currency effect that inverts the story
Sterling supplies the strangest distortion. When the pound falls, the dollar and euro earnings of those multinationals translate into more pounds, so their sterling share prices tend to rise. The index can therefore climb precisely because markets have taken fright at Britain's prospects. The textbook case came after the referendum of June 2016: the pound suffered its steepest fall in decades, and within weeks the FTSE 100 had surged to its best run in years. Newspapers reported a stock-market vote of confidence. What had actually happened was closer to the opposite: a repricing of foreign income through a devalued currency. Anyone reading the index as a verdict on the British economy that summer got the story exactly backwards.
There is a better domestic gauge sitting one tier down. The FTSE 250, the next 250 companies by size, earns roughly half its revenue inside the UK and is stuffed with housebuilders, domestic banks, retailers and industrial firms whose fortunes track British demand, interest rates and consumer confidence far more closely. On days when the two indices diverge sharply, the 250 falling while the 100 rises, the divergence itself is usually the real signal: sterling is weakening, and investors are marking down domestically exposed businesses while marking up the exporters.
Why the shorthand persists
The FTSE 100 survives as the headline number partly through habit and partly because a single figure, updated by the second, is irresistible to broadcasters in a way that quarterly ONS GDP estimates, revised months later, are not. It does measure something real: the value global investors place on a particular set of large firms that happen to keep their listings in London, and by extension something about London's standing as a capital market. Pension funds and ISA holders with tracker funds have a genuine stake in it. But as a proxy for wages, employment, house prices or the order books of British firms, it fails on construction. The next time a bulletin pairs a rising FTSE with talk of national recovery, it is worth remembering that the index would rise just as happily on a falling pound, a spike in copper, or a good quarter for a bank in Hong Kong.
