Overseas Revenues – A Boon For FTSE 100 Performance

By Sandrine Soubeyran and Alberto Allegrucci, Global Investment Research, FTSE Russell

A close inspection of the UK equity market’s composition shows some distinctions. In its totality, the UK market mixes companies that have significant global exposure, and therefore are highly dependent on the external environment, with those that have a higher domestic focus. As a result, differentiating between the large blue chip FTSE 100 and the mid-cap FTSE 250 is important, as index behaviours can differ based on the characteristics of their constituents, such as the extent of their global exposure.

For the purpose of this analysis, we use the FTSE All-Share Index series to represent the UK equity market, which is an amalgam of the blue-chip FTSE 100, the mid-cap FTSE 250, and the FTSE SmallCap Indices. We compare the largest 350 UK companies, represented by the FTSE 100 index and FTSE 250 Index, with the global equity market (FTSE All-World ex UK).

FTSE 100 trumps FTSE 250 and the World over 12 months

Analysing the long, medium and short-term performances of large and medium-sized UK companies with the performance of the global index shows that over a 20-year period, UK domestic companies (FTSE 250) have outperformed (Chart 1).

However, the outcome changes on a shorter timeline. Over a five-year period, both the global index and the blue-chip FTSE 100 have outperformed the FTSE 250, while, over the last twelve months, only the FTSE 100 has gained, contrasting double-digit losses for the FTSE 250 and the global equity index.

Moreover, the risk-return profile over the last five years indicates that for a similar level of volatility, the FTSE 100 has registered a higher return compared to the FTSE 250, while the World performed better than both UK indices, with a higher return for a lower level of volatility (Chart 2).

Why is that? Looking into the causes of the FTSE 100’s recent outperformance shows that different industry exposures are a key reason. The blue-chip index has greater exposure to natural resources (i.e., energy and materials) and consumer staples than the FTSE 250, which has a higher exposure to financials, industrials, and real estates.

Historically, large companies have tended to do well during the final phases of an economic cycle, before a downturn. As investors become increasingly concerned about a correction, exacerbated recently by the Bank of England’s monetary tightening (increased from 0.25% to 2.25% in 2022), they have shown a preference for ‘quality’ companies.

In addition, global companies have been more resilient within the challenging economic backdrop of the last years (impacts from Brexit, Covid-19 lockdowns, and conflicts in Europe). The FTSE 100 also has a much higher exposure to energy (13.5% versus 1.8% in the FTSE 250), an industry that has strongly benefited from high oil prices.

The strong performance from the oil, gas and coal, and metals and mining sector (especially in Q3), over the last twelve months, has helped bolster the FTSE 100 performance relative to that of the FTSE 250 as did the outperformance of the sector in the FTSE 100 compared to its smaller equivalent. Finally, as can be seen in Chart 4, the sharp rebound in the travel and leisure sector has also been positive since Q2 2022.

Overseas revenues a boost to global companies

Finally, FTSE 100 companies are more exposed to foreign revenues than those in the FTSE 250. Around 82% of the FTSE 100 revenues are from overseas markets, while, though still sizeable, this figure drops to nearly 57% for the FTSE 250 (Chart 5).

Moreover, the chart shows that dependence on overseas revenues since 2014 has been rising for FTSE 100 companies, while the revenue base for FTSE 250 companies has shifted towards the UK since Brexit in 2016 and during the Covid-19 lockdowns in 2020.

Currency matters

The sharp depreciation of sterling against the euro and the US dollar has provided a greater boost to companies with large overseas revenues than those with a more domestic focus, and as seen in Chart 5, FTSE 100 companies have benefited from that trend.

The question is how much weaker can the sterling get? The recent suggestion that the Bank of England may have to increase rates significantly to control inflation at their next policy meeting in November does not bode well for its future. However, should history repeat itself, a weak sterling could be just the remedy for companies with extensive overseas revenues?

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