The launch of the FTSE 100 (FTSE Index: EO100.FGI – news) index 30 years ago signalled a new era for investors creating great wealth as well as causing mayhem. By Martin Vander Weyer
Thirty years ago tomorrow, without much fanfare, “the Footsie” entered our national vocabulary. The FTSE 100 index of the 100 leading shares listed on the London Stock Exchange (Other OTC: LDNXF – news) , measured by their market value, was created to give a better guide to market sentiment than the more exclusive FT Index of 30 blue-chip shares that had held sway since 1935.
Its launch marked more than the introduction of a useful new tool for City professionals, however. It was a signpost towards a new era of financial sophistication —a world of opportunities for millions of investors, but also the unleashing of a new force beyond their control. Both the triumph and the tyranny of markets had begun.
Set at a base level of 1,000 on January 3 1984, the FTSE 100 has been recalculated every 15 seconds during trading hours since then, and its membership has changed quarterly as the fortunes of constituent companies have risen and fallen. The index suffered its worst-ever one-day fall on Black Monday in October 1987, and hit its highest closing level of 6,950 in December 1999 at the teetering peak of the dotcom boom. In the new century it has halved and doubled again twice over, in a rollercoaster ride back to 6,749 where it closed on Tuesday — poised, many pundits predict, for an assault on 7,000 in early 2014.
And so we have come to regard the FTSE 100 as an excitable proxy for the national economic mood: irrationally exuberant (to paraphrase Alan Greenspan of the US Federal Reserve commenting on the late-Nineties boom) when prospects look good; volatile and depressive when results disappoint or new threats loom. In either direction, the FTSE 100 typically runs ahead of other indicators of confidence or pessimism, but is still a vital point of reference.
The 14 per cent rise in the index in 2013 was not unreasonable as a reflection of the economic recovery that the Governor of the Bank of England tells us has taken root; indeed, we might have seen a bigger rise last year had it not been for fear of the coming impact of the withdrawal of quantitative easing by the US Fed and other central banks, and for nervousness in the mining and banking sectors.
But those are stories for the City pages as the new year unfolds. In a broader sense, the lesson of the FTSE 100 over the past 30 years is about how the future rarely turns out as we imagined it would, and how institutions that seem permanent rarely turn out that way. Hence only 30 of the original 100 great British companies, as we then thought of them, survive in the index today, and only 19 of those (including the likes of Barclays (LSE: BARC.L – news) , BP (LSE: BP.L – news) , Marks & Spencer and Unilever (NYSE: UL – news) ) have never dropped out of it.
Among the original constituents are names that once seemed carved into the monumental stonework of corporate life, yet have disappeared almost without trace. Remember General Electric Co, the mighty electronics and defence conglomerate assembled in the Sixties by Arnold Weinstock, of which it used to be said that “what’s good for GEC is good for the UK”? Gone forever, rebranded “Marconi”, then destroyed by management folly in the dotcom boom and its aftermath. Or Imperial Chemical Industries, a beacon of British international success? Shrunken, split up, sold off. Or Pilkington Brothers, the plate-glass pioneer whose name was saluted wherever skyscrapers were built around the world? Now a division of Nippon Sheet Glass (Frankfurt: NI9.F – news) of Osaka, Japan (EUREX: FMJP.EX – news) .
So it goes, and in any listing there are bound to be colourful fallers over a period of decades — just as there is a long roll-call of football clubs, from Barnsley to Wolverhampton Wanderers, that have dropped out of the Premier League since its inception in 1992.
What today’s FTSE 100 represents is not so much a permanent portrait of the upper echelon of British corporate life as a dynamic cross-section of global economic priorities, as reflected in the share-buying preferences of international investors as they change from quarter to quarter. Among the newer entrants, for example, is the Swiss-based miner and commodity trader Glencore Xstrata (Other OTC: GLCNF – news) , one of several natural resources giants in the list whose core businesses are conducted in the remotest parts of the globe.
Reflecting another kind of change, here too is the Cambridge (LSE: COG.L – news) -based semiconductor and software group ARM Holdings (LSE: ARM.L – news) , a rare example of a British Nineties hi-tech start-up that grew up to be a global player; and of an earlier vintage, though it was still only a gleam in its founder’s eye back in 1984, the mobile phone operator Vodafone.
What has all this done for the City? Back in January 1984, the Square Mile was still the clubbable closed shop it had been for a century and a half, since the Stock Exchange developed as a bourse for shares as well as government bonds, and since the industrial revolution brought with it a surge in demand for finance of all kinds.
As a hive of stockbroking partnerships and elite merchant banks, operating according to long-established hierarchies, dress codes and lunch rituals, it was impenetrable to eager Americans arriving from Wall Street — and an irritation to Margaret Thatcher. She saw the City as a complacent public-school enclave that needed a blast of reform to make it a more efficient generator of capital for businesses she admired (takeover-hungry Hanson Trust, for example, another FTSE 100 name long gone), and a channel for the privatisation sales that would turn Britain into a “shareholding democracy”. The first big test came in November (Dusseldorf: NBXB.DU – news) 1984, with the mass sale of British Telecom shares.
So change was in the offing. In October 1986 the ”Big Bang’’ reforms deregulated the stock market and allowed banks to buy up broking firms. The old hierarchies were replaced by a new world of screen-filled trading floors inhabited by bonus-hungry dealers who thought the market was their plaything — until it showed them on Black Monday, just a year later, that it was a monster beyond their control.
In the decade that followed, most of the British-owned investment banking ventures that had arrived with such élan in the mid-Eighties either failed or were bought up by foreigners with sufficient capital to keep them going. The City of 2000 and beyond did not look much like the City imagined by the reformers of 1984 — and much of it wasn’t even in the City, but in the gleaming canyons of Canary Wharf, where the likes of the ill-fated Lehman Brothers operated in lavish style. It was a nuclear accident waiting to happen, and in 2008 the cataclysm came.
That wasn’t the fault of the FTSE 100, or any of the other global market indices that the hyperactive financial world watches from minute to minute. If the indices themselves had an unhealthy effect, it was in the explosive growth of derivative instruments that used them as benchmarks but sometimes turned out to be toxic. And perhaps they encouraged the delusion that if markets are rising, all must be well — no one has yet invented a reliable index of danger ahead.
But the real significance of the FTSE 100’s 30th anniversary is as a first flag of the era of market supremacy — for the great wealth it has created as well as for the mayhem it has caused. And in the changing list of constituent companies, it has provided a perfect mirror of epochal shifts: from industrial might to digital creativity, from old corporate titans stuck in the past to new ones hunting for global opportunities. In that sense, it’s a pocket guide to an ever-changing economic world.