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The election of Boris Johnson as the U.K.’s new Prime Minister has heightened Brexit concerns. As this note will demonstrate, however, these concerns have already been at least partly priced into the U.K.’s FTSE-100 Index – and perhaps unduly so given the global orientation of its most highly-weighted companies. Exposure to the FTSE-100 Index – as available through the newly-launched F100 ETF – also offers attractive dividend income and diversification opportunities for Australian investors.
There’s potential value in FTSE-100 stocks
The FTSE-100 Index, which the BetaShares FTSE 100 ETF (ASX Code: F100) aims to track, includes the top 100 blue-chip companies listed on the London Stock Exchange.
Although the FTSE-100 Index has broadly matched global equity performance over the past decade or so, it has tended to under-perform in more recent years due to both global oil price weakness (which has hurt energy stocks represented in the Index) and the U.K.’s lingering Brexit uncertainty.
Relative return performance: FTSE 100 Index vs MSCI Developed World Index: Jan-03 to Jun-19*
Source: Bloomberg. *Indices = 100 as at 31-Jan-2003. Shows performance of index, not ETF, and does not take into account ETFs fees and costs. Past performance is not indicative of future performance. You cannot invest directly in an index.
This under-performance has arguably given rise to a potential ‘value opportunity’. As seen in the chart below, the FTSE 100’s price-to-book value by end-June 2019 was trading at a substantial 28% discount to developed world equities – compared with an average discount since early 2003 of only 9%.
Price-to-book value: FTSE 100 Index vs MSCI Developed World Index – Jan-03 to Jun-19
Brexit blues may linger but the U.K. is well-placed longer term
As regards the U.K.’s ‘Brexit’ decision to leave the European Union, uncertainty is likely to linger for a while longer – especially now that “hard brexiteer” Boris Johnson has been elected U.K. Prime Minister.
Johnson has vowed to strike a “better deal” with the EU than achieved by former PM Theresa May even at the risk of a “no-deal” exit later this year. A major sticking point remains the so-called “Irish backstop” whereby Northern Ireland would effectively remain within the EU for trading purposes – until new U.K.-EU trading relations can be finalised – so as to avoid renewed physical custom checkpoints at the politically sensitive border with the Irish Republic. Brexiteers dislike the backstop compromise, though a majority of the U.K. Parliament also dislike its current alternative – a “no deal” exit from the EU. How Johnson manages to resolve these conflicts remains to be seen.
So far at least, the U.K. economy has held up reasonably well despite lingering Brexit uncertainty, though more recent indicators – such as U.K. factory orders – have weakened. If the U.K.’s exit from the EU is far from smooth – or at least current uncertainty persists for an extended period – the risk of a near-term recession would clearly grow.
Longer-term, however, the U.K. economy is likely well-placed to perform. Even in the event of a ‘no deal’ exit from the EU, for example, the U.K. should continue to enjoy the relatively low trade barriers that the EU typically offers other countries under World Trade Organisation non-discriminatory provisions.
The U.K. will also be well-placed to negotiate more extensive trade deals with a range of countries – and could potentially develop a competitive advantage over the rest of Europe through greater deregulation and pro-competition policies.
FTSE-100 stocks are less tied to the U.K. market than commonly assumed
Either way, it should also be noted that a potential U.K. economic downturn in the short term need not derail the broader global economy – given that the U.K.’s economy accounts for only 2.5% of global GDP.
As a result, given that many of the major companies that make up the FTSE-100 Index have an extensive global footprint, even a hard Brexit may not, in fact, be that devastating for the fortunes of these firms.
After all, the FTSE-100 Index includes a number of global leaders, many of which can only be accessed via the U.K. sharemarket. F100’s holdings include global household names such as the world’s largest energy company, Royal Dutch Shell, one of the world’s largest financial institutions, HSBC, multi-national pharmaceutical company and owner of many of the world’s leading pharmaceutical and consumer healthcare products, GlaxoSmithKline, and Diageo, owner of brands such as Johnnie Walker and Guinness.
According to FactSet1 estimates, around 70% of earnings from FTSE-100 companies comes from outside the United Kingdom, compared with only 30% of earnings for S&P 500 companies that comes from outside the United States.
FTSE-100 stocks offer another global diversification opportunity
Given its company mix, the FTSE-100 Index also offers useful elements of sector diversification. The FTSE-100 tends to have a relatively higher exposure to companies in the consumer staples and energy sectors compared to both the Australian and the global market overall. Compared to Australia, the FTSE-100 Index is less exposed to financials, materials and property sectors, and is less exposed to technology compared to the broader global market.
Industry sector weight differences: FTSE 100 Index vs S&P/ASX 200 Index and MSCI Developed World Index: As at 10 July 2019
FTSE-100 stocks offer attractive dividends
Another notable attraction of the FTSE-100 stocks, especially for income-seeking Australian investors, has been its relatively high income returns by global standards.
As seen in the chart below, the average annual dividend yield for the FTSE 100 Index was 4.8% as at end-June 2019, compared with 4.6% for the S&P/ASX 200 Index and 2.5% for the global MSCI-ACWI benchmark index.
The FTSE-100’s dividend yield has consistently been above that of the global benchmark index, and in recent years has even been competitive with that of the Australian market (before consideration of franking credits).
Net dividend yields: U.K., Australia and the world – Jan-03 to Jun-19
Source: Bloomberg. Past performance is not indicative of future performance. You cannot invest directly in an index.
The BetaShares FTSE 100 ETF (ASX Code: F100): Learn more in our upcoming webinar
The BetaShares FTSE 100 ETF (ASX Code F100) is the first U.K.-specific ETF on the ASX. By tracking the well-known FTSE 100 Index, F100 offers Australian investors global diversification, potential for attractive income returns and arguably a value opportunity during current Brexit uncertainty. To learn more about the opportunities F100 has to offer, register for our upcoming webinar on Wednesday, 7 August 2019 at 12:00pm – 1:00pm AEST.
1. FactSet Geographic Revenue Exposure (GeoRevTM) dataset. Figures relate to March 2017 for the FTSE-100 and December 2017 for the S&P 500.
Note: The Fund is not in any way connected to or sponsored, endorsed, sold or promoted by the London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). The LSE Group does not accept any liability whatsoever to any person arising out of the use of the Fund or the underlying index data.