Defying the odds – the FTSE All-Share Index

It’s no exaggeration to say that the global nature of many of the businesses listed on the FTSE  All-Share Index has served the UK’s leading benchmark index well in recent years.  Rewind to 23 June 2016 and the UK voted to leave the European Union (EU). The term Brexit found its way into our vocabulary as we discussed what leaving the EU, which the UK had been a member of since 1973, would mean for businesses and households across the country.

The UK’s decision to leave the EU created an unforetold amount of uncertainty for everyone, especially for investors in UK company shares. The UK would be required to negotiate a withdrawal deal with the EU before 29 March 2019, or risk crashing out without one. There was then the question of the government needing to negotiate trade deals with other countries around the world.

Investors lose confidence in UK equities immediately following referendum

In the aftermath of the outcome of the vote, the FTSE All-Share fell sharply as nervous investors readjusted their holdings in UK equities to account for the big dollop of uncertainty that now needed to be accounted for. It wasn’t long though before the FTSE All-Share reversed its tracks though and headed higher because something else - namely a favourable currency scenario - was at play.

Sterling dropped sharply on 24 June 2016 and has remained volatile since. Losses in sterling signal lower confidence in the outlook for the UK economy and tied into that the fact that investors in sterling would need to take on a much greater degree of risk because of the uncertainty posed by Brexit, and the not-knowing what a UK outside the EU would look like. Media reports commenting on the ‘dive’ in sterling understandably became commonplace. But a weaker currency for an index like the FTSE All-Share, where 70% of earnings are derived overseas, is not such a bad thing.

Even in April this year, when political risk ramped up again, investors watched the FTSE All-Share hold firm while politicians debated – right up to the wire – how, if at all, the UK should leave the EU. In early April MPs once again voted against Theresa May’s deal, resulting in the EU agreeing to push back the UK’s departure to 31 October 2019. Eventually the prime minister resigned, and speculation of a general election being called, as early as this year, increased. This has created more uncertainty for the UK corporate sector, forcing businesses to keep their spending plans on hold.

But this delay did not stop the FTSE All-Share from hitting its highest level in six months on 2 April, with investors taking their cue from the weaker pound and a higher oil price. As we have seen on so many occasions since the referendum, the global nature of the businesses in the FTSE All-Share means that they benefit when the pound loses ground against the US dollar, and their US dollar-denominated earnings are worth more when converted into sterling. 

Global juggernauts with overseas operations

The story of HSBC – the biggest stock in the FTSE All-Share and one of the world’s largest banking and financial services organisations - illustrates how UK-listed businesses are successfully taking advantage of faster rates of growth in the emerging markets, while being a ’traditional’ bank in the UK.

Asia-focused HSBC contributed to the strong performance of the index in April, buoyed by the Chinese central bank’s decision to extend its stimulus programme and increase spending on infrastructure. It was the diversification of HSBC’s business which supported its share-price performance in late 2018 when financial stocks with more of a focus on the UK fell sharply because of fears the UK could potentially leave the EU without a deal.

HSBC is just one example of a well-established and well-governed business with a proven track record of being a leader in its field. The business sits alongside the likes of Standard Chartered, Vodafone, Rolls-Royce, pharmaceutical company GlaxoSmithKline, consumer goods manufacturer Unilever, temporary power generation company Aggreko and alcoholic drinks producer Diageo.

Each of these businesses operates/ and or sells its goods and services in the UK and boasts operations beyond these shores, and they therefore generate a large share of their earnings in US dollars, and euros and in other currencies for that matter, in the process. This means that their earnings are, to a certain extent, insulated from events the UK. Such companies performed particularly well in 2017, being well placed to benefit from the confidence in the improving Asian economy and the improving rates of growth in the region. And these companies have rebounded strongly in the first three months of this year. Short-term volatility aside, consumer-facing businesses like Unilever and Diageo continue to benefit from the structural trends taking place in the emerging markets and unquenched appetite among people in less developed markets as they become consumers for the first-time ever. Such long-term trends aren’t going to be disrupted in the long term by the latest slowdown in the region, or whether the People’s Bank of China boosts its stimulus package or not.

Admittedly the trade tariff debacle between the US and China is a risk to global businesses as we do not know which sectors or countries the US government might target next or where the trade war could end. It is the uncertainty resulting from this situation which could cause the most harm as we saw in May when markets, including the FTSE All-Share, ended lower overall.

High standards of corporate governance combined with a focus on rewarding shareholders

These businesses also provide investors with a favourable way to access the stronger rates of growth in China and the emerging markets, and via businesses that adhere to high standards of corporate governance. These businesses are also renowned for rewarding their shareholders with growing dividends, another attractive trait of the UK corporate sector. 

Allocation to basic material-related companies provides access to stronger growth in emerging economies

In terms of the oil price, news of tighter US sanctions on Iran was the factor here. Again, the basic materials sector, which makes up 20% of the FTSE All-Share, is another important component of the UK’s leading benchmark. The UK stock market is exposed to different types of commodity businesses. The basic materials companies listed on the FTSE All-Share include the world’s biggest industrial metal mining businesses Glencore, Anglo American and BHP Billiton, precious metal miners Fresnillo and Acacia Mining and oil & gas majors BP and Anglo Dutch Shell.

The diversified nature of the basic materials sector results in different drivers of share-price performance. More specifically, China’s demand for raw materials, needed for its many industries and the ongoing development of the country’s infrastructure and spending on roads, hospitals, apartments as people move from the countryside to towns, has benefited those companies which mine iron ore and copper. The announcement of further stimulus from the Chinese central bank in March has also boosted confidence. Conversely, gold mining companies tend to do better in times of uncertainty and when inflationary pressures are building as many investors like gold for its hedging properties. Meanwhile, the oil price is influenced by the economic outlook and geopolitical risks, which in turn affect supply and demand fundamentals, the key driver of energy prices. Admittedly the drivers aren’t always positive and there are several players involved as demonstrated recently by Russia’s top oil producer said it opposed extending oil cuts with Opec until the end of the year.

We simply do not know how the situation the UK currently finds itself in will play out and how the political landscape might change in the future. We believe, however, that the composition of the FTSE All-Share, the international bias of the many well-governed and well-established businesses that it offers, means that there are other factors for investors in UK equities to consider and indeed to focus on.

Helen Delaney, Investment Proposition Manager joined Aviva in 2012 from M&G Investments where she was a senior investment writer covering equities, fixed income and property. She started her career in 2000 as a journalist with Financial Times Business on trade publication Investment Week. A key part of her role is to produce fund reports for our customers about Aviva’s default funds My Future and Future Focus. Helen also prepares investment-related presentations, market commentaries and reviews investment-related literature.