-14.3%. 2020 was the worst year for the FTSE 100 index since the global financial crisis in 2008. Back then, the index of leading UK company shares fell by 31.3%.
Double-digit losses for the FTSE 100 in 2020 were hardly unexpected. After all, we had a global pandemic and the UK economy experienced a significant hit.
But compare the FTSE in 2020 to other global equity indices and we see a very different story.
For example, the Dow Jones Industrial Average in the US reached record highs, adding 7.2% in a calendar year. The S&P 500 index, which is heavily weighted towards a handful of gigantic tech stocks, put on 16.3% in 2020.
Things could have been worse for UK investors last year. The index recovered strongly since experiencing a significant correction in March, when it was around a third lower than it is today.
But why did the FTSE 100 lose ground in 2020 when the US markets surged ahead so strongly? That’s the theme of this video, where I’ll also explain why using the FTSE 100 as a proxy for UK equity performance is probably a bad idea and what 2021 might hold for the index.
What factors contributed to a loss for the FTSE 100 in 2020, down 14.3% over 12 months?
I should start by saying that it’s easy to attribute external factors to stock market performance, with the benefit of hindsight, but correlation isn’t necessarily causation. What I mean by this is that simple explanations can look neat and tidy in justifying market performance over a particular time period. The true explanation is often a lot more complex, with myriad factors driving returns.
At a headline level though, the FTSE 100 in 2020 had to contend with a variety of headwinds. We had a global pandemic, prompting draconian lockdown measures and a deep economic recession in the UK. We had Brexit, with the threat of a no-deal end to the transition period looming over British businesses right up until Christmas Eve.
But Brexit isn’t a good sole explanation for a falling FTSE in 2020. That’s because companies in the index are largely made up of overseas multinationals.
When Pound Sterling takes a tumble, the relative value of these overseas earnings is boosted in the UK. That’s why a dip in Pound Sterling is often correlated with a rise in the FTSE 100.
However, the Pound finished up 2020 in a strong position, at its highest level against the US Dollar since the start of May 2018. This strong finish for Pound Sterling took a bit of a shine off the market in the final day of trading.
Another reason for the relatively poor performance of the FTSE 100 last year is the low allocation in the index to tech stocks.
2020 was a great year for tech stocks. The enforced working from home revolution meant that companies like Zoom, Netflix, Amazon and Peloton had a great twelve months.
The FTSE 100 is sometimes criticised as being a 20th century index, due to its lack of tech exposure. 2020 wasn’t a great year for old school businesses, including oil and mining stocks, which dominate the FTSE 100.
Other parts of the index to slump in 2020 included British Airways owner IAG, down 61% during the year. Rolls Royce, which manufactures jet engines for aircraft companies was down 52%.
BP and Royal Dutch Shell both lost more than 40% last year. Brent Crude, the benchmark for global oil prices, started 2020 at $66.41 and finished the year at $51.70 a barrel, losing 22% in a year.
Banks on the FTSE 100 had a challenging year too, largely the result of Brexit fears. There are still some unresolved issues in the new trade deal when it comes to financial services, and that nervousness was apparent throughout the year. Lloyds Banking Group lost 41% and NatWest lost 30%.
In a year of winners and losers, the FTSE 100 contained more of the latter. It had some winners too, which is why the losses were contained at minus 14.3% for the year; it could have been a lot worse.
Ocado, for example, gained 78% last year. When we’re all stuck at home, it’s little surprise that a business that delivers food performs strongly.
Another 2020 winner was Scottish Mortgage Trust; an investment trust listed on the London Stock Exchange and part of the FTSE 100. This trust is effectively an investment vehicle, investing in other companies. Because it invests in many tech companies, including Tesla and Amazon, it was the top-performing FTSE 100 company in 2020, more than doubling in value.
Could 2021 be better for the FTSE 100? There are several factors acting in its favour for the year ahead.
We’ve got some certainty now when it comes to trading arrangements between the UK and EU. I’ve no doubt there will be some short-term teething problems as the new trade deal is implemented, but it’s a long way from the uncertainty of a no-deal Brexit, operating on World Trade Organisation terms.
We’ve also got a route out of the pandemic, with the regulatory approval in the UK of two vaccines; Pfizer/BioNTech and Oxford/AstraZeneca.
Timing remains a serious issue for vaccine rollout, with slow delivery by the government and NHS likely to be outpaced by exponential growth in infection rates. We’re still to see the true impact of household mixing over Christmas, and Covid rates and deaths are already at record highs.
Personally, I’m still not expecting a full reopening of the UK economy ahead of the summer, because I think people are too optimistic about the positive impact of the vaccines, even if their delivery is focused on protecting the most vulnerable in society; our oldest old, care home residents, frontline NHS workers, teaching staff, etc.
But regardless of how the FTSE 100 performs in 2021, it remains a poor measure of UK companies and the UK economy, because of its heavy weighting towards overseas earnings. A better measure is, I think, the FTSE 250 index, which tracks the performance of the next largest 250 companies listed on the London Stock Exchange. The FTSE 250 is more domestically focused.
And for even better diversification, there’s the FTSE All Share, made up of more than 600 of the 2,000 plus companies listed on the London market.
One of the biggest lessons from the FTSE 100 this year, despite it losing ground, is that market timing is a fallacy.
The index crashed below 5,000 by 23rd March, when the reality of the Covid-19 pandemic set in, losing nearly 2,550 points in less than three months. But it recovered strongly, as equity markets tend to do. Compared to its trough in March, the index is up 31.3% at the end of the year.
Investors who are easily spooked by market corrections tend to miss out on the subsequent recoveries. That’s why we tell our clients that it’s time in the market that matters, not market timing.
Another valuable lesson from the performance of the FTSE 100 in 2020 is the need for diversification.
As an investor, you would be nuts to invest solely in FTSE 100 companies, for all of the reasons explained in this video but mainly due to a lack of diversification. A well-diversified investment portfolio should have domestic and international equity exposure, as well as covering other mainstream investment asset classes; fixed income securities and commercial property.
If you put all of your investment eggs in the FTSE 100 index last year, you’re likely to be disappointed. Thankfully, it’s increasingly rare for investors to make a basic mistake like this, instead spreading their money across markets and asset classes.
Where do you think the FTSE 100 will head in 2021?