The FTSE 100 is the headline stock index of the London Stock Exchange. This index constitutes the top 100 largest companies listed on the London Stock Exchange in terms of their market capitalization representing in overall at least 80 per cent of the total market capitalization of the London Stock Exchange at any point of time. This is the second-largest stock index on the London Stock Exchange in terms of market capitalization after the FTSE All-share index. These companies are not only the largest in terms of market capitalization but also have the largest revenues and are also the most influential amongst the London Stock Exchange-listed companies. However, the most prominent aspect of these companies on the index is the foreign exchange earned by them and the different geographies that they have their operations located in.
The multinational and international operations of these companies give the FTSE 100 an international flavour and several other advantages which have been discussed below.
London Stock Exchange the international stock exchange – The higher number of multinational and global companies on the London Stock Exchange means that the exchange is representative of the international business space instead of the domestic British economic and business environment. This attracts numerous foreign companies to come to be listed at the London Stock Exchange to seek funding for their enterprises, thereby increasing the status of London as one of the most important financial centres of the world.
This status of London as being the most important financial centre of the world is an old one and has brought the city much of its wealth and reputation since ages. The city for long has been a financer and aider of businesses and explorers who have brought enormous wealth to the country. It is still one of the prime trading destinations in the world of many commodities like bullion, non-bullion metal, currencies, debt and financial derivative assets. The largest business sector catered to by the city of London is finance and banking services with most of the world’s largest corporate and investment banking organizations having their European operation headquarters located in the city. London actively seeks to maintain and promote its status as the important financial and trading destinations of the world, and the FTSE 100 multinational and international companies are a showcase of the same.
Making the British Economy less risky – The multinational and international companies which are constituents of the London Stock Exchange expose the British Economy to the broader international Economy. The widespread international operations and international revenue base of these companies ensure that structural and business inefficiencies of the domestic British Economy are increasingly mitigated with the increased income flow from international markets. This not only protects these companies from the vagaries of the British Economy but also protects other smaller companies as a cascading effect. The recent events in the run-up to Brexit have demonstrated the importance of the FTSE 100 constituent companies. While many of the companies on the London Stock Exchange were severely affected, other FTSE 100 constituent companies had little impact on their operations and continued to be profitable during the period, most even gave record dividends to their shareholders in 2019 despite the general mood among the British businesses to conserve cash. This incremental distribution of money this year helped aid the upliftment of spirits among the British consumers, which reflected in their spending patterns in subsequent months. The multinational companies on the London Stock Exchange give the British Economy more depth.
Making the London Stock Exchange less risky - As a result of more and more companies on the FTSE 100 increasing their multinational presence, the systematic risk of investing on the London Stock Exchange has also come down significantly. These companies increasingly link the London stock market to the international markets, with the effect that the factors specific to the British domestic Economy like economic slowdown or Brexit will have a diminished impact on the London Stock Exchange as the exposure of these companies to international operations increase. With the decrease in systematic risk, the whole market becomes a favourable investment destination for foreign investors in comparison to other stock exchanges. This active risk management mechanism not only helps London Stock Exchange attract more and more international institutional investors, but also the increased stability provided attracts companies the world over to list their shares on this exchange, thereby increasing the size and popularity of the London Stock Exchange.
It is not that the FTSE 100 constituent companies always held this status. Over a period of time since the inception of this index and with the addition and deletion of many companies on this index over a period of time and with these companies increasing their scope business, this status has been achieved. Not long ago the index was known as the barometer of the British Economy; Progressively, however, this title has gone to the FTSE 250 index which has a higher number of British companies with more exposure to the domestic British economy than the international economy. The FTSE 100 index now has acquired the status of a global stock index to be compared against other such indices around the world.
The FTSE 100 constituent companies with increasing multinational operations have now donned the critical role of establishing the London Stock Exchange and the city of London as an international business destination. As individual investment ideas also these companies have provided investors with not only an increased protection against domestic systematic risk elements, but also exposure to international business where earnings of the companies could be distributed in foreign currencies, which will protect the investors against falling exchange rates of the British pound sterling against major currencies like Euro or United States Dollar.
The index is also increasingly used by fund houses and investment bankers as a benchmark to compare the performances of their own portfolios. The increased stability of this index makes it an index of choice for passive index replication funds, who always look for optimally risky investment avenues. These mutual funds are also responsible for bringing in large amounts of funds to the London Stock Exchange, providing it with a strong base.
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