The FTSE 100 index has been surprisingly resilient in the face of mounting pressures. The 1-month performance of the UK all share index has risen from 6,888.69 on March 26 to its current level around 7,425.
The current trajectory of the FTSE 100 index is bullish, as evidenced by strong short-term gains. Unlike its trans-Atlantic counterparts, the FTSE 100 index has a year to date return of -3.41%, indicating that broader macroeconomic pressures are asserting an influence over this index.
The Correlation Between the FTSE 100 & GBP
From an investment perspective, the correlation between the price level of the FTSE 100 index and the GBP is clear. When the GBP appreciates, the FTSE 100 index tends to move in the opposite direction. The 52-week trading range of this index is 6,866.94 on the low end and 7,792.56 on the high-end. The FTSE 100 is inversely correlated with the GBP. This is particularly true of blue chip indices. The reason we continually see this market dynamic in action is that the constituent components of leading global bourses like the FTSE 100 have many of their profit-earning operations abroad.
These multinational corporations derive a significant share of their revenue streams outside the UK. In the case of the FTSE 100, this arena is predominantly in Europe. When the GBP fluctuates, it directly impacts prices of listed companies. When GBP strengthens, then the demand for goods and services declines. This drops the value of FTSE 100 companies. When GBP weakens, this raises foreign demand for UK produced goods and services. This results in a strengthening of the FTSE 100 index.
There is yet another interesting dynamic at play, says Wilkins Finance expert, David H. Levy,
‘The FTSE 100 derives a significant amount of its revenues abroad. We estimate this to be between 70% – 80% of revenues. Some 30% of revenue streams are from emerging market economies. Plus, there is an estimated 17% from Europe and 5% from Japan. This is also true for the CAC 40, and the DAX 30. When GBP plunges, we see foreign revenue streams being repatriated back to the UK at much higher volumes. In other words, the equivalent GBP value of a EUR or USD is more in GBP terms. This increases the performance of these indices and validates the inverse relationship’
How is the Brexit Saga Impacting the FTSE 100 Index?
The Brexit conundrum continues to befuddle investors. The linear relationship between the status of Brexit negotiations and the performance of the FTSE 100 is ironclad. Most of the positivity we are seeing now is related to indications that London will retain its premier status (to a degree) after the official Brexit date is reached. The vote on Brexit took place on June 23, 2016 and in that time the FTSE 100 has enjoyed unprecedented gains.
It broke through the critical 7,000 level and continues to deliver strong returns. Plus, the GBP has also recovered from a 31-year low to trade in the 1.40 range against the greenback. For business investors, a rate hike is on the cards. This will invariably attract greater levels of investment to the UK and strengthen the GBP somewhat. From a business perspective, all signs are pointing to a moderate recovery for sterling as Brexit negotiations continue in earnest.
