To answer @richardjmurphy

Nothing says to me that it makes any sense that the market now has a value of about 5,500.

We’re facing the biggest recession for 80 years, melt down in Europe and global warning becoming reality. And the markets still presume nothing is happening.

If you want evidence of irrationality that’s it.

If the FTSE 100 was a reflection of the domestic economy then he\’d have a point. Possibly.

Rolls-Royce is now an international business that makes 85% of its sales outside Britain, having doubled its exports over the past two decades.

Rolls Royce isn\’t the only one either.

Starting from the top, Aggreko is in 34 countries, AMEC in 40, Anglo American god knows how many (and I\’m not sure that it has anything at all in the UK), Antofagasta is a Chilean copper company, ARM powers just about every smart phone and tablet globally (plus many other things), Ashmore is an investment manager dedicated to the emerging markets (ie, not exposed to the UK economy), Astra Zeneca is a gloobal pharma company….we might think that Admiral, Aviva and ABF are more or less exposed to the UK market. So, that\’s the As….going on down the list, ENRC is a metals producer in Kazakhstan, Cairn drills for oil in India, Essar ditto etc etc etc.

I would be absolutely astonished to find that more than 20% of the actual business operations represented in the FTSE-100 were UK based or largely influenced by the UK economy.

Which is why looking to the UK economy to explain FTSE is simply silly. It\’s just not a domestic market at all.

3 comments on “To answer @richardjmurphy

  1. Isn’t there another factor than the expected value / income of the companies? There’s no income to be made by keeping cash in the bank, the gold price is high, and you don’t need to be a great thinker to see inflation getting worse. So where else would you put your money other than the stock market? I don’t know what the economic term is, but when I buy shares it’s cos there are only two sane options for cash – turn it into an asset, or spend it. Keeping it as cash is mad! I think I’ve heard this same argument given as a reason why house prices are still higher than we might reasonably expect.

  2. And that’s counting heads, not economic weight (say, market cap or earnings). By economic weight, it’s even easier to see that the FTSE 100 is more exposed to the overseas situation: the top 10 by market cap are Shell, Vodafone, HSBC, BP, Glaxo, British American Tobacco, Rio Tinto, BG Group, BHP Billiton and AstraZeneca.

    Not that it should be surprising to anyone with a pair of brain cells that the ten largest companies in the FTSE-100 are major multinationals.

  3. The below is a summary of a research piece released last week… Answers thorough –

    100 Internationally exposed UK companies

    Our ASR UK foreign 100 index is the reverse of the ASR UK 100
    Our note yesterday highlighted that hankering for an ‘Island UK’ index would have provided investors with a set of stocks that look like the Italian or Spanish markets and have worse 10 year returns. As international exposure has been good for investors, we are presenting the opposite: a list of the 100 largest UK companies that generate more than 60% of their sales from outside the UK.

    These stocks more than regained the losses of 2008/9 bear market
    These stocks have outperformed their domestic counterparts since Jan 2000 by 114%, and the FTSE100 by 38% (Chart 1). Higher international exposure had helped them, by late 2010, to regain the losses of the 2008/9 bear market. Even with the recent stock market falls, the index is within 6% of its 2008 peak.

    Returns driven by overweight Basic Resource and underweight Banks
    Partly this is due to the sector exposure. Relative to the FTSE100, the index is overweight Basic Resources and Industrial Goods, but this cyclical tilt is tempered by high exposure to Healthcare and Food & Beverage. More importantly in performance terms, the index is underweight Banks, as well as Utilities and Retail.

    No valuation premium despite excess performance
    This superior performance has not led to a valuation premium relative to the FTSE100. The ASR UK Foreign 100 is trading on a trailing PE of 10.0x compared with the FTSE100 on 9.8x. Looking at dividend yields, there is little valuation difference either. But within this group there is a wide variation of valuations from the Healthcare stocks such as GlaxoSmithKline trading on 17.6x to the Resources stocks, such as Rio Tinto on 7.7x

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